What Europe’s tax grab from Apple should teach Sen. Warren

Haiyun Jiang

Public confidence in big business ranks below every major institution in the United States except Congress, according to Gallup. So it comes as little surprise that when the European Commission ruled recently that Apple had struck what the commission characterized as an unfair tax deal with Ireland and should have to pay back $14.5 billion, many were quick to view the case as typically craven trickery by an unscrupulous multinational.

{mosads}A prime example of this narrative came from Massachusetts Sen. Elizabeth Warren (D), who accused Apple of attributing profits to a “phantom head office” and decried the “jaw-dropping variety of tax-dodging schemes” companies use to engage in an “international tax shell game.”

Sounds pretty nefarious, doesn’t it? Warren frames such “cross-border games” as proof that the U.S. corporate tax code is “broken” and in need of a three-part reform agenda: First, she would have Congress squeeze more tax revenue out of big companies. Second, she says we should oppose reforms that would only tax domestic earnings. And third, she argues we must “level the playing field for small business.”

Yet in all of this, the senator is right about only one thing: The corporate tax code is broken. The rest of her analysis — starting with her portrayal of multinational corporations as villains, and including each of her policy prescriptions — completely misreads the facts.

The truth is large multinationals are not villains; they are the key drivers of U.S. economic growth and innovation. Even if they paid no corporate taxes, companies like Apple would still be delivering huge benefits to the country. They create and support millions of high-paying jobs, provide innovative products that steadily decrease in price and increase in quality, deliver financial gains to hundreds of institutional pension plans that otherwise worry about how to amass sufficient funds to pay retirees, and generate exports that enable consumers to pay for their imports.

As a rationale for her proposal to ratchet up taxes on big companies, Warren laments that U.S. corporate tax revenue has fallen significantly, both as a share of gross domestic product (GDP) and as a share of total tax revenues. But this is not principally because companies like Apple have gotten lower tax rates. It is largely due to lower individual rates and the fact that, unlike many countries, the United States lets many businesses file as pass-through entities — in which case, income is not taxed at the business level but instead shows up on individual business owners’ tax returns as their personal earnings. For many years after federal taxes were reformed in 1986, the highest individual rates were lower than the corporate rate, so an increasing share of businesses adopted the practice.

The case for Warren’s position on domestic versus international taxes is equally flawed. She discounts the threat of companies moving operations abroad or losing global market share in response to tax policy changes even though her home state of Massachusetts, where both chambers of the legislature are controlled by Democrats, recently cut the state corporate tax rate precisely to be more globally competitive.

Indeed, the fact that virtually all Organization for Economic Cooperation and Development (OECD) countries except the United States have cut their corporate taxes over the last two decades surely has something to do with the recent increase in corporate inversions and foreign acquisitions of U.S. companies.

One study shows that a 1 percentage point reduction in the host country tax rate raises inward foreign direct investment by 3.3 percent. Because of these differences in tax rates, U.S. companies feel the need to move operations abroad in order to remain globally competitive with their foreign counterparts. Likewise, the high U.S. corporate tax rate makes the U.S. economy less attractive as a location for inward foreign direct investment.

This points to a key difference between Warren’s views and those of many corporate tax experts. Whereas she focuses on raising barriers to prevent U.S. companies from moving activity abroad, others focus on establishing a tax code that retains activity at home while also attracting foreign investment to U.S. shores. But the real threat of high taxes is not just that productive activity goes abroad or doesn’t come to the United States; it is that the activity doesn’t take place at all. Nowhere does Warren acknowledge the large deadweight burden that today’s high tax rate imposes on investment.

Finally, there is Warren’s contention that the tax code should favor smaller businesses over larger ones. The truth is that the federal tax structure already favors smaller businesses, as Eric Toder of the Urban-Brookings Tax Policy Center and others have shown. Moreover, smaller businesses are not the primary source of new job creation or innovation in today’s economy.

In addition, most of them do not face international competition and so lowering their taxes would not affect where they locate themselves. And as a group they are less productive, pay lower wages, are less unionized and provide fewer employee benefits than large firms. Although many romanticize small businesses’ role in the economy, showering attention on them distracts us from adopting policies that will actually boost growth and raise living standards for American workers.

The European Commission clearly thinks U.S. tech firms should have a higher European tax liability, even if it doesn’t increase their worldwide tax payments. But because U.S. companies receive a credit for foreign taxes when they bring profits back to the United States, any payments Apple makes to Ireland may ultimately be paid by U.S. taxpayers. As a result, the United States now faces another assault on its tax base — one that does not depend on U.S. companies moving overseas.

Rather than adopt policies that would further deter corporate investment, Congress and the administration need to aggressively fight this revenue grab and insist on compliance with existing tax treaties and regulations while enacting a more competitive corporate rate domestically. Otherwise, U.S. taxpayers and workers will end up losing a lot more.

Kennedy is a senior fellow at the Information Technology and Innovation Foundation, a tech policy think tank. Follow him @JV_Kennedy.

The views expressed by contributors are their own and not the views of The Hill.

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