Tax Transparency Would Take a Bite Out of Future Apples

Apple Inc.’s clever tax-avoidance strategies, revealed at last week’s highly publicized U.S. Senate hearing, probably inspired more than a few copycats. What company, after all, wouldn’t want to sidestep billions of dollars in U.S. taxes, as Apple did, by creating stateless Irish subsidiaries that owe no taxes anywhere?

Before executives file the paperwork, they should consider this: The hearing also inspired European Union leaders to push for a new law that would require corporations to reveal the amount of taxes they paid, country by country. EU officials put the measure on a legislative fast track in hopes it would become law this summer.

Such transparency could accomplish two things: First, by forcing corporations to reveal revenue, head count, profit and taxes paid per country, the EU would subject companies that pay less than their fair share to potentially embarrassing public scrutiny. Starbucks Corp. in December voluntarily paid the U.K. more than it legally owed to quiet a controversy over its low tax payments.

Second, similar public pressure could dissuade politicians in low-tax countries, including Ireland, Luxembourg and the Netherlands, from continuing to offer their countries as tax havens, depriving others of needed revenue.

Behavior Modification

If the EU wants companies to pay more tax, it would be far better simply to amend its tax laws. But behavior modification through transparency is the next best thing. The tactic makes such good sense that the U.S., and individual states, should do the same.

As two left-leaning advocacy groups reported in 2011, many U.S. corporations pay little income tax to the states, on top of low federal taxes. They showed that 68 out of 265 companies studied had paid no state income tax in at least one year between 2008 and 2010, despite reporting collective profits of $117 billion in that period. Over three years, the 265 companies avoided about $43 billion in state taxes.

Competition to attract investment is a main reason for the decline in state tax payments. When California offers generous research-and-development credits to attract manufacturers, other states must match those tax breaks or watch jobs move across the border. The result is a race to the bottom. And corporations know all too well how to play one state against another.

Companies shouldn’t be faulted for seeking the best tax deals they can find, and states are right to try to lure jobs. But public officials need to do a better job of ensuring that the breaks they’re offering to corporations are in taxpayers’ interests. The Pew Center on the States said in a study published in April 2012 that half the states hadn’t taken basic steps to find that out.

Some well-intentioned breaks, such as the film production that 44 states now offer, may have gone too far. Louisiana alone issued $180 million in film tax credits in 2011. In most states, unused credits can be sold to other companies -- even if they aren’t in the film business -- to lower their tax bills. Bank of America Corp., the Hershey Co. and Comcast Corp. have benefited from this secondary market.

A watchdog group called Good Jobs First, which seeks to hold accountable the government officials who dole out economic-development money, is on the right track. It follows 249,000 awards from 427 programs in 50 states and offers a database that anyone can search.

Tax Disclosure

Here’s another way to take advantage of transparency’s positive effects: Require companies to disclose what they actually pay in federal income taxes. As the Senate Permanent Subcommittee on Investigations reported last week, Apple’s 2011 annual report states that its tax liability on $34.2 billion in revenue came to $8.2 billion, for an effective tax rate of 24.2 percent. That calculation, however, includes U.S., state and foreign taxes. In fact, Apple paid only $2.5 billion in federal income taxes, for a 20.1 percent effective rate.

The Securities and Exchange Commission could make tax transparency a reality by requiring publicly traded companies to report actual taxes paid to federal, state, local and foreign governments. Investors should urge the SEC to adopt this change. Those who believe that lower taxes always equal higher earnings should consider the long term: Companies will eventually suffer if states are unable to provide good roads, schools and essential services. What’s more, state subsidies encourage companies to lobby for loopholes rather than maximize profits through innovation and cost-cutting.

Unless states know what economic benefit they are getting in return, tax privileges can become another form of corporate welfare. And if the EU, the U.S. and the 50 states won’t stop handing them out like lollipops, taxpayers at least deserve to know who’s paying what to whom -- or not.


To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.