CLBR #97: David Cay Johnston on Apple’s i-Tax Dodge

Since this program aired as part of our annual Tax Day edition, the Senate Committee on Investigations released a study finding that Apple has been very aggressive in pursuing offshore tax shelters.  For example,  Apple shifted $30 billion in income for 2009-2012 to an Irish subsidiary that had no employees and it apparently is perfectly legal to do so.

The report was followed by hearings in which Apple vigorously defended its practices.

David Cay Johnston on Apple

Our guest, Pulitzer Prize winning author David Cay Johnston is very critical of Apple, but notes that the true scandal is that Washington has known about this for some time and done nothing to address it.

From:  David Cay Johnston, Separate But Unequal: Apple Defers its Taxes, You Foot the Bill, The National Memo

. . . . But Apple operates under very different rules. At the end of March it has more than $102 billion of mostly untaxed profits. If Apple were a worker it would have paid the federal government $36 billion in taxes.  Instead of paying taxes, Apple has taxes that are deferred for as long as it chooses.

In total, I estimate from corporate disclosure documents, American multinational companies have $2 trillion of untaxed profits offshore because they did just what Apple has done.  Had Congress required those companies to pay up last year it would have been the equivalent of all the income taxes paid by everyone in America from January until July 10. Imagine that, all the income taxes taken out of your pay or pension from January into the middle of summer just so Apple and other multinational companies can profit today and pay their taxes someday.

The $700 billion of income taxes that would have come due without deferral would also have reduced the federal budget deficit last year by more than two-thirds. Instead, the federal government borrowed a little more than a trillion last year to pay its bills.  In effect the federal government loaned Apple the $36 billion in deferred taxes at zero interest. Imagine how rich you would be if you could keep all the income taxes withheld from your paycheck this year and then pay the money, interest-free, 30 years from now.

Because taxes deferred are at zero interest, inflation erodes the value of the taxes owed. If Apple waits 30 years and then chooses to pay its taxes the government will get the equivalent of 40 cents on today’s dollar, assuming 3 percent annual inflation.  Meanwhile, Apple will be investing that $36 billion, earning interest. If it earns 3 percent in 30 years, it will have more than $87 billion.

Now jump forward to 2043. Apple pays $36 billion in taxes from its $87 billion cash pile, leaving it with $51 billion after taxes in 2043 dollars.

. . . . But the bottom line is the same – America has two tax systems, separate and unequal. There is a word to describe such systems: un-American.

There is also a question to ask: Why do we tax ourselves today so Apple can pay its taxes someday?

The Cost of Apple’s Tax Shelters

US News’ Kenneth Thomas and The Exchange’s Rick Newmann each wrote intelligent pieces on the price of Apple’s tax shelters.

From: Kenneth Thomas, Apple’s Tax Dodging Double-Talk Is Tough to Swallow, US News & World Report

This week, the Senate’s Permanent Subcommittee on Investigations released a report on Apple (via Ars Technica) which shows how the company managed to amass $102 billion in offshore profits on which it is deferring taxes. As Ars Technica notes:

Some of the interesting bits from the Senate’s report: three Apple subsidiaries in Ireland claim no responsibility to pay income taxes to any country. Apple Operations International, one of the Ireland three, reported $30 billion in income during 2009 to 2012 despite having no employees and not filing income taxes anywhere within the last five years.

This is, amazingly enough, perfectly legal (to use the title of David Cay Johnston’s great book), but “it’s also profoundly unethical,” according to Richard Murphy of Tax Research UK. Apple creates all of its products in the United States, yet engages in the legal fiction that an Irish-based entity, Apple Sales International, actually owns right to the patents’ use outside the U.S. and hence is entitled to royalties from all non-U.S. subsidiaries.

According to the Senate report, Apple shifted “$74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2%.” The source for this was no less than Apple CEO Tim Cook himself.

With this legal fiction, Apple drains away funds from the country which has let it flourish and shifts the burden to other taxpayers. As reported in a New York Times article in April 2012, Apple does the same thing within the United States, shifting profits out of California into zero-tax Nevada, cutting support to the schools and other institutions from which it benefits, again leaving other taxpayers to foot the bill.

From: Rick Newmann, Here’s Who Pays the Bill for Apple’s Tax Avoidance, The Exchange

The victims, meanwhile, are ordinary taxpayers who fund most of the federal government. During the 1950s, individual income taxes typically accounted for about 60% of the government’s tax revenue, with corporate taxes covering the other 40 percent. By 1970 individuals paid 73% of all taxes. By 1990 it was 83 percent, with the peak coming in 2009, when corporations claimed steep losses and individuals paid 87% of all taxes. By 2012, that had drifted down to 82%, with corporations paying 18%.

Despite that shrinking share of the nation’s tax payments, the business lobby routinely claims taxes on U.S. corporations are too high because the official federal tax rate of 35 percent exceeds the rate in every other developed nation. But after credits and deductions, most U.S. companies pay an effective tax rate that’s considerably lower, ranging from 23 to 35 percent.

[Related: Sorry, Tim Cook, U.S. Tax Law Isn’t a Big Economic Drag]

Some large U.S. multinationals are able to lower their taxes further by moving money among divisions based in different countries, to take advantage of the lowest tax rates. A 2011 New York Times story explained how GE earned a $14.2 billion profit in 2010 yet paid no federal income tax in the United States. Companies such as Apple that sell software or other types of intellectual property can take advantage of other loopholes that allow wide latitude for where they claim profits, and therefore pay taxes.

The corporate tax burden began to decline as a share of the nation’s total at a time when most taxes were falling. Tax reform in 1986 helped streamline the tax code, and a strong economy during the 1990s brought in more tax revenue with lower rates, leaving Washington flush. But that’s obviously not the case anymore. Since 2001, the national debt has exploded from $5.8 trillion to $17 trillion, with gaping annual deficits as far as the eye can see.

The Guardian did a good profile on the Apple tax dodge.

And then there’s Jon Stewart’s take on the issue.

David Cay Johnston on Bill Moyers

The Congressional Report

David Cay Johnston is the author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–and Cheat Everybody Else

Since the mid-1970s, there has been a dramatic shift in America’s socioeconomic system, one that has gone virtually unnoticed by the general public. Tax policies and their enforcement have become a disaster, and thanks to discreet lobbying by a segment of the top 1 percent, Washington is reluctant or unable to fix them. The corporate income tax, the estate tax, and the gift tax have been largely ignored by the media. But the cumulative results are remarkable: today someone who earns a yearly salary of $60,000 pays a larger percentage of his income in taxes than the four hundred richest Americans.

Pulitzer Prize-winning investigative reporter David Cay Johnston exposes exactly how the middle class is being squeezed to create a widening wealth gap that threatens the stability of the country. By relating the compelling tales of real people across all areas of society, he reveals the truth behind:

  • “middle class” tax cuts and exactly whom they benefit
  • how workers are being cheated out of their retirement plans while disgraced CEOs walk away with millions
  • how some corporations avoid paying any federal income tax
  • how a law meant to prevent cheating by the top 2 percent of Americans no longer affects most of them, but has morphed into a stealth tax on single mothers making just $28,000
  • why the working poor are seven times more likely to be audited by the IRS than everyone else
  • how the IRS became so weak that even when it was handed complete banking records detailing massive cheating by 1,600 people, it prosecuted only 4 percent of them

Johnston has been breaking pieces of this story on the front page of The New York Times for seven years. With Perfectly Legal, he puts the whole shocking narrative together in a way that will stir up media attention and make readers angry about the state of our country.

Johnston is also the author of The Fine Print and Free Lunch (publisher summaries below).

A bestselling author’s shocking analysis of the many ways we are victimized by corporations

David Cay Johnston, the bestselling author of Perfectly Legal and Free Lunch, is famous for exposing the perfidies of our biggest institutions. Now he turns his attention to the ways huge corporations hide sneaky stipulations in just about every contract, often with government permission.

No other modern country gives corporations the unfettered power found in America to gouge customers, shortchange workers, and erect barriers to fair play. Johnston shares solutions you can use to fight back against the obscure fees and taxes, and to help end these devious practices.

Free Lunch answers the great mystery of our time: How did our strong and growing economy give way to job uncertainty, debt, bankruptcy, and fear for millions of Americans? Acclaimed reporter David Cay Johnston reveals how government policies and spending have reached deep into the wallets of the many to benefit the top 1% of the wealthiest.

He shows exactly who has been getting free lunches from the government-from $100 million to Warren Buffett, to $1.3 billion to the owners of the Yankees and Mets. But of course there’s really no such thing as a free lunch. The taxpayer always picks up the bill. With his in depth reporting, vivid stories, and sharp analysis, Johnston reveals the forces that shape our everyday economic lives-and shows us how we can finally make things better.