Question #7

195 CHAPTER FIVE CORPORATIONS CASE 5.6 Corporate Taxation INTHE UNITED STATES, THE RATE AT WHICH For many companies, tax avoidane is a sotistated corporations are taxed ranges from 15 to 35 percent, game-almost an art form. In 2013 it came out that Apple. depending on the size of their income. That's a higher top the nation's most profitable technology company, was also marginal tax rate than in any other developed country. But one of its most successful tax avoiders, thanks to a com- 35 percent is only the nominal rate; few if any corporations plex web of international subsidiaries the company has cre- actually pay that much. Over a recent tive-year period, for ated. Many of those subsidiaries are incorporated in Ireland, example, General Electric paid 17.9 percent of its income where Apple negotiated a special tax rate of only 2 percent, in corporate taxes, and that includes not just federal tax although in fact they are run from Cupertino, Califormia. but state, local, and foreign taxes as well. FedEx paid 20.1 Furthermore, even though they are incorporated in Ireland, percent in federal tax, Amazon 6.6 percent, and Ford Motor some of these ofshore entities have no stated country of tax Company 4.2 percent. The reason for this is that the tax code residence and thus pay no taxes atall, even though they hold provides corporations with plenty of exemptions. In fact, a tens of billions of dolars. study by the Government Accountability Office estimates that Other companies, such as Microsoft and Google, 80 or so business exemptions cut in half the revenue com- engage in "transter pricing. "This shifts profits generated ing from corporate taxation. Two of the biggest corporate tax in the United States to offshore tax havens where the IRS breaks are accelerated depreciation of machinery and equip- ment and deferral of income from foreign sources. can't get at them. Companies accomplish this trick by transterring intellectual property rights to specially cre- That's one of the main reasons why these days corpora ated foreign subsidiaries, which then charge the parent tions pay a smaller share of the nation's taves than they company stf iensing fees for using its own intelectual used to. In the 1950s, the revenue from corporate tavation property, But even low-tech com amounted to about a third of total federal tax revenue or about shell games like this. Caterpillar cut its tax bill by 6 percent of the nation's income. Today tamounts to less than milion a year simply by putting the name of a Swiss sub- a tenth-that is, to about $1 out of every $10 cllected in sidiary on the invoices tor parts it sent from the United federal tax-or about 2 percent of national Income. Personal States to customers around the world. Even Starbucks fig income taxes and payrol taxes (which support Social Security ured out how to play the game. it told shareholders that it and Medicare) provide about 80 percent of the federal goven was making large profits in Britain but filed u.K. tax forms ment's annual revenue. Yet, these days companies take a showing losses, resulting in its paying no Brtish taxes at larger share of national income than ever before, and corpo rate taxes as a share of corporate profits are at a record low. all for three years in a row, despite billions of dollars in sales there