Over at Vox, Matt Yglesias has an article that is supposed to outrage all of those who already believe that the Senate and House tax-reform plans are just a big handout to the rich and American corporations. He makes the claim that the GOP will reduce Apple’s tax bill by “a staggering $47 billion.”
Unfortunately, this article is completely misleading. Apple isn’t going to benefit from a tax windfall of $47 billion. Instead, the IRS is going to get a $31 billion windfall from Apple.
How can we have such different numbers, you may ask? Because Yglesias is operating in a make-believe world. He arbitrarily and unrealistically assumes that Apple will bring its overseas profits to America in the absence of tax reform.
In the real world, however, one of the reasons for tax reform is that the current system of “worldwide taxation” harshly penalizes firms that bring money back to America.
Here’s what you need to know. When American companies earn money in other countries, they pay taxes to the governments of those jurisdictions. That’s the reasonable part. And it works both ways: Foreign companies that earn money in America pay taxes to the IRS.
The screwy part is that current tax law tells American companies that if they bring their already taxed foreign profits back to the U.S., the IRS gets to impose another layer of tax. Very few other nations practice this self-destructive form of double taxation. To make matters worse, the United States has the highest corporate tax rate in the developed world.
So it makes perfect sense that U.S. multinationals indefinitely defer this tax by holding their profits abroad (or they “invert” and permanently protect their foreign-source income from the IRS).
That’s what Apple, like many other companies, is doing. Indeed, American multinationals are holding about $2.5 trillion overseas. It’s not terribly efficient for them to lock up their funds, but it’s better than needlessly paying an additional layer of tax to the IRS.
So how do we encourage companies to bring this cash home? Many of us have been clamoring for a shift to a lower rate and a system of “territorial taxation.”
And that’s what the Senate or the House plans would do, hence the change in Apple’s tax situation. The new law would tax domestic corporate income at 20 percent but no longer would impose U.S. tax on profits earned (and subject to tax) in other nations. For our friends on the left who always want America to copy the rest of the world, they should be happy. Almost all other countries already have territorial taxation.
And our leftist friends should be doubly happy because Republicans are engaging in a big revenue grab as part of reform. There would be a one-time repatriation tax of roughly 14 percent on that foreign income whether the company brings the money back or not. In Apple’s case that tax would collect roughly $31.4 billion.
In other words, Apple would go from paying zero dollars on its foreign profits kept abroad to paying a one-time $31.4 billion tax bill. But Yglesias claims that the company is getting a windfall of $47 billion, which is the difference between a $78.6 billion tax payment that exists solely in his mind and the $31.4 billion that actually will be collected if tax reform gets enacted.
The Wall Street Journal has a good article on this, this time about the same claim made by the Financial Times (so much for financial literacy on the part of the newspaper). The editorial board concludes:
This is the latest of many false claims that corporations are the sole beneficiaries of the Republican tax plan, even though the GOP agenda includes “base erosion” rules and many other clamps designed to address current tax loopholes and prevent future corporate tax trickery. Whether the media attacks on the Republican tax bill represent economic illiteracy or ideological tendentiousness is a judgment we’ll leave to readers.