The U.S. corporate income tax in a time of high profits
Apple Inc. made news yesterday when it announced the newest model of the iPhone and a number of other updates to its other products. The company was also in the news late last month, but the subject was instead about its profits. The European Commission ruled that a tax arrangement between Apple and Ireland violated European Union rules and that the Cupertino, CA-based technology company owed Ireland €13 billion, about $14.5 billion, in back taxes.
The Apple incident is just an extreme example of how far some countries will go to get corporate profits booked within their borders. Apple may eventually have to pay more taxes to Ireland—legal challenges could drag on for years. Yet the company still has more than $215 billion in cash sitting overseas as a means of reducing their tax liability —even if the company’s CEO seems ready to move the cash to the United States.
Apple is far from alone in shifting its profits overseas, as Reed College economist Kimberly Clausing pointed out in a report for Equitable Growth earlier this year. As corporate profits have risen over the past 30 years, corporate tax revenue as fallen as a share of GDP and offshoring is a major contributor to this trend.. (See Figure 1.)
Looking at this graph, it seems as if policymakers might be better off scrapping the U.S. corporate income tax and trying to tax profits some other way. Some analysts have called for shifting the tax burden off of corporations and onto the shareholders of those firms. But more and more U.S. stocks are not taxable due to the rise of tax-advantaged retirement plans and more foreign ownership of U.S. stocks.
These trends and many other reasons are why policymakers interested in taxing corporate profits should focus on reforming the corporate income tax, not scrapping it. On Monday, Equitable Growth will publish a new report by Clausing that makes the argument for the “indispensable corporate tax.” Check back next week to see what reforms could help.