Compass and money on graphs

Who Pays Higher Tax Rates: Corporations or Consumers?

A new report suggests tech companies like Apple and Google don't pay their fair share of taxes.

Compass and money on graphs

Apple, eBay and Google pay about 80 percent lower tax rates internationally, according to a WalletHub report.

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Large corporations don’t pay their fair share in taxes. At least, that seems to be the prevailing notion among mainstream America. The truth, however, is far less straightforward – as so often seems to be the case with matters of taxation.

According to a WalletHub report released this month, the average Standard & Poor's 100 company actually pays a 14 percent higher tax rate than the top 3 percent of individual taxpayers (it’s only natural to compare the largest companies with the wealthiest consumers).  But that’s not to say all of America’s corporate elite is on the straight and narrow. 

The combination of international tax loopholes and relatively high domestic tax rates enable the average S&P 100 company to pay 30 percent less abroad than it does in the United States, and that trend is particularly pronounced among technology companies. The likes of Apple, eBay and Google pay around 80 percent lower tax rates internationally, which is critical since those companies make about twice as much outside the U.S. as they do within it. 

How is that possible? Well, have you heard the one about the two Irish guys, the Dutchman and the tech company who walk into a bar? They all get rich.

Creative Corporate Accounting

Back in the 1980s, Apple pioneered a strategy known as the “Double Irish with a Dutch Sandwich” that now serves as a blueprint for companies that make a lot of their money from software royalties and other intellectual property. 

It’s kind of complicated, but it basically involves incorporating two subsidiary companies in Ireland – one of which is based in Ireland, the other headquartered in a tax haven country like Bermuda or the British Virgin Islands. Quirks in Irish tax law allow companies incorporated in the Emerald Isle to pay taxes based on where they are physically located (hence the haven-based subsidiary) and enable the tax-free transfer of funds between European countries (which is where the Dutchman, a Netherlands-based go-between, comes in). Long story short, U.S. tech corporations can put all of their patents and intellectual property under the name of their Irish subsidiaries, route revenue all around the world and ultimately pay far less than the U.S. statutory rate on a good portion of their profits. 

S&P 100 companies have also made it a practice to hide behind deferrals. More specifically, the rate at which they report paying taxes is often significantly inflated by amounts that aren’t actually being paid to governments either domestic or local, but rather are set aside for potential tax obligations in the future. In the meantime, however, the money is still in their control.

Ultimately, one has to figure that such corporate accounting tactics are a product of a tax system that has become far too complicated as well as somewhat out of touch with modern business practices. The question is how to fix things.

Repairing a Broken System

The most accurate way to describe the U.S. corporate tax landscape is overcomplicated to the point of inefficiency.  And like tax reform more broadly, there are innumerable suggestions for how to fix it. The following are just a few of the reform ideas currently being championed by university taxation professors.

• Waive the repatriation tax. Some experts believe corporations would bring more of their money into the United States if there weren’t such a steep repatriation tax for revenue earned internationally. “There is greater than a trillion dollars offshore with U.S. companies that cannot repatriate without a severe dividend tax,” Ira Weiss, clinical professor of accounting and entrepreneurship at the University of Chicago’s Booth School of Business, tells WalletHub. “We are creating jobs offshore by leaving this cash offshore. It is absolutely irresponsible to not adjust this inequity in the global markets in order to help our economy in so many quantifiable ways.”

How can we adjust this inequity?  Charles Kane, a senior lecturer at Massachusetts Institute of Technology’s Sloan School of Management, recommends a “one-time amnesty on U.S. companies to move cash back into the U.S. without a related dividend tax if the funds are used to create more jobs in the U.S.”

• Eliminate corporate taxes. Justin Hopkins, assistant professor of business administration at University of Virginia’s Darden School of Business, says if he had his druthers, we would do away with corporate taxation entirely.  “The largest shareholders of many corporations are public pension plans,” he says. “So, by taxing corporations we are basically levying taxes on public servants, employees and customers. If the government wants to tax the ‘rich,’ it should do so at the individual level.”

• Replace corporate taxes with an environmental tax. Clemens Sialm, associate professor of finance at the University of Texas-Austin, also recommends eliminating corporate taxes given how they incentivize companies to increase leverage and move operations offshore. Sialm says replacing corporate taxes with an environmental tax would “enable the government to raise revenues while maintaining environmental objectives. These tax reforms would support sustainable economic growth.”

Ultimately, there seems to be a number of ways to skin the corporate economic cat. It seems to be a task that must be done, however, if either taxpayer opinion or hard numbers are to be trusted.