It’s no secret that the corporate tax environment in the United States is fubar. The diagnosis — corroborated by the public, policymakers, and enterprising advocacy groups — is multifaceted, but there is really only one general course of treatment to take, and that is reform. Deep, structural reform (call it an overhaul) that reduces complexity, discourages gamesmanship, and encourages the repatriation of cash held overseas.
Repatriation has become a headline issue over the past couple of years as U.S. tech companies increase their participation in the high-profile game of international tax arbitrage that most multinational corporations play. Consumer tech giant Apple Inc. (NASDAQ:AAPL) was placed front and center in this conversation when Chief Executive Officer Tim Cook made an appearance before the Senate Permanent Subcommittee on Investigations in 2013.
During the hearing, it came to light that Apple had avoided paying U.S. income taxes on profits of $74 billion it made between 2009 and 2012 by using multiple subsidiaries in low-tax countries such as Ireland. Moreover, the company is holding as much as $111 billion at its foreign subsidiaries, money that is untaxable by the U.S. government unless it is repatriated.
Whether Uncle Sam should be able to get his hands on this cash is a good topic for any speech and debate club, and it’s a huge fiscal issue for U.S. policymakers. According to an analysis done by Bloomberg, multinational companies held a combined $1.95 trillion outside of the U.S. at the end of 2013, a cash hoard that was up 11.8 percent from 2012.
A separate analysis done by the Bureau of Investigative Journalism found that four top U.S. tech and Internet companies — Apple, Google Inc. (NASDAQ:GOOG), Microsoft Corp. (NASDAQ:MSFT), and Cisco Systems (NASDAQ:CSCO) –hold a combined $255 billion worth of cash, cash equivalents, and marketable securities in foreign subsidiaries. Repatriation of this cash at the current 35 percent top corporate tax rate would put nearly $90 billion in Uncle Sam’s pocket, enough to reduce the annual deficit by about 17 percent.
But the financial windfall to the government actually seems like a second-order concern. The primary concern is that this money actually gets back to the U.S. in the first place so that it can be put to use, invested back into the American economic infrastructure directly by the businesses that generated the money in the first place and not simply sitting in the hypothetical rustic coffers of Irish castles.
Unfortunately, the insane structure of the tax system — not just in the U.S. but overseas, as well — is a huge deterrent for corporations to repatriate cash held overseas. The deterrent is so great that instead of repatriating cash to finance its massive shareholder return program, Apple decided to take on debt. Granted, the debt environment was particularly friendly at the time, but the moral of the story is the same: Instead of paying the tax, corporations will simply find ways to keep the cash overseas, where it will do little to no good for the U.S.
One way overseas cash does interface with the U.S. government is through Treasury securities. According to the Bureau of Investigative Journalism, the big four tech titans — Apple, Google, Microsoft, and Cisco — own about $163 billion in U.S. sovereign and government agency debt.
Repatriation isn’t the only way in which the tax system is failing. Enterprising advocacy groups like Citizens for Tax Justice (CTJ) — a left-leaning public policy think tank — have been fighting for years to change the broken domestic corporate tax system. In February, the organization released a report called “The Sorry State of Corporate Taxes” highlighting this piece of information: Of 288 profitable U.S. businesses examined between 2008 and 2013, twenty-six of them “enjoyed negative income tax rates,” and 111 of them had a negative federal income tax rate in at least one year in the five-year period.
CTJ calculated that the “total amount of federal income tax subsidies enjoyed by the 288 profitable corporations over the five years was $362 billion,” and highlighted companies like Boeing Co. (NYSE:BA), General Electric Co. (NYSE:GE), and Verizon Communications Inc. (NYSE:VZ) as examples. Moreover, the CTJ calculated that as a group, the 288 corporations examined paid an effective federal income tax rate of just 19.4 percent.