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“Separate But Unequal”: Why Do We Tax Ourselves Today So Apple Can Pay Its Taxes Someday?

The richest of the rich are different from you and me because instead of paying taxes, Congress lets them pay interest.

This little-known difference was on full display before the Senate Permanent Investigations subcommittee this week, though you would hardly know that from the news reports of testimony by Apple CEO Tim Cook and his top finance and tax executives.

The reality is that America has two income tax systems, separate and unequal. And as with all such separate and unequal systems, the powerful benefit by sticking everyone else with the costs.

The system is so unequal that corporate tax departments at the biggest multinationals have been transformed from cost centers into what Enron called its tax office: a profit center.

To most Americans, taxes are an expense. The idea that a tax can make you richer may seem hard to believe, but as the Apple executives showed in their testimony, it is standard operating procedure these days.

But instead of reporting this, we got mostly fluffy political stories. The New York Times account was typical, focusing on how Cook so charmed senators he had them “practically eating out of his hand.”

What Apple is really doing is eating your lunch.

Let’s start with how Congress taxes most people. It does not trust them to report their incomes in full or to pay their taxes, and with good reason since numerous studies show that a third or more of self-reported income simply does not get written down on income tax returns.

We all know this as the “underground economy” of people who get paid in cash; clean pools, cut grass or sell another type of grass. (Many drug dealers, however, report their incomes in full knowing that if they get caught dealing and cheating on their taxes their prison terms will be longer.)

People who work, and pensioners, have their taxes taken out of their checks before they get paid — which is why we call the shrunken cash that we pocket “take-home pay.”

Because Congress also does not trust workers and retirees to report their incomes in full, it requires their employers and pension plans to verify how much they make. The Social Security Administration adds up all the W-2 wages-paid forms for people with any paid work. In 2011 there were 151,380,759 people who earned  $6,238,607,249,941.26, which would usually be written up as $6.2 trillion.

Congress also says you can defer tax on money you save in a 401(k) plan if your employer offers one, a maximum of $23,000 for older workers. If you do not have a 401(k) you can save no more than $6,000 this year and pay taxes when you withdraw.

In other words, you get fully or almost fully taxed when you earn.

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.

As advisors to the very wealthy teach their clients, deferring a tax for 30 years is the functional equivalent of not paying any tax.

In the textbook version of events, that huge pile of untaxed profits that Apple keeps offshore cannot be put to work in America. In reality here is what happens:

—Apple has its tax haven subsidiary deposit the money in the United States at a too-big-to-fail-bank, eliminating any risk of loss it would incur with smaller banks.

—Apple has the American bank buy U.S. Treasury bills, notes and bonds so that its untaxed profits, which force the government to borrow, earn interest.

—Apple can also borrow from itself, making short-term loans from its many separate piles of untaxed offshore profits to fund any operational needs in the U.S.

—Rather than tap its $102 billion of offshore cash, Apple sold corporate bonds for periods of up to 30 years at less than 2 percent interest.

As Cook explained to the senators, why pay taxes at 35 percent when you can borrow at 2 percent? Cook is right from a financial perspective. At 2 percent, the interest on the interest, measured to infinity, will never equal the 35 percent taxes avoided.

But here is the best part of the whole deal, which Cook and Peter Oppenheimer, Apple’s chief financial officer, explained to the senators, but the news media neglected to report.

Apple turns some of the profits it earns inside the U.S. into tax-deductible expenses, which it pays to its offshore subsidiaries.

Now, if you move a dollar you earned from your right pocket to your left, nothing significant happens. Your wealth is unaffected and your tax bill is unchanged.

But Apple and other multinationals have an American right pocket, from which they pull cash to put in their Irish, Cayman Islands, Singaporean and other left pockets. When they do that the profit goes poof on their tax return and a tax deduction gets added.

Accountants use black ink to show profit, and red for losses and expenses. This modern accounting scheme is what the alchemists of old sought, hoping to turn lead into gold. But unlike the fictional philosopher’s stone, this alchemy works.

So, to review, you get taxed before you get paid and can set aside only modest sums with the taxes deferred until your old age.

Apple and its corporate peers get to earn profits now, but pay taxes decades into the future and possibly never, while earning interest on the taxes it defers into the future — interest you must finance as a taxpayer through higher taxes, reduced government services or more federal debt.

The one place Apple cannot escape taxes is on the interest it earns on its untaxed hoard of offshore cash, as Apple’s top tax officer, Phillip Bullock emphasized to Senator Carl Levin, the Michigan Democrat who chairs the investigations panel.

Levin’s staff, its reports issued with bipartisan support, also found that Apple did owe some foreign taxes on profits it earned overseas.

It pays the Irish government a corporate tax rate of 2 percent under a deal made in 1980 when it was a pipsqueak company. On some other earnings its tax rate is 0.05 percent – that is a nickel on each $100 of profit.

Rich individuals – very, very, very rich individuals – get to do the same thing: earn now and be taxed much later, if at all, by paying interest on borrowed money instead of paying taxes.

There are different techniques to defer, delay and escape paying income taxes for executives, business founders, managers of hedge and private equity funds and movie stars, all of which will be explained in future National Memo columns.

One of these techniques explains in good part why companies have been slashing health and retirement benefits for workers – because it masks the real costs of letting executives earn now and pay taxes either later or never.

Another explains why Mitt Romney was never going to release his income tax returns for the years he ran Bain Capital Management, the private equity fund that made him rich.

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?

 

By: David Cay Johnston, The National Memo, May 23, 2013

May 24, 2013 Posted by | Congress, Taxes | , , , , , , , | Leave a comment

“Compassionless Conservatism”: A Gaffe Is When A Republican Tells The Truth

This Sunday, I attended a panel at the Brooklyn Book Festival in which moderator Ta-Nehisi Coates started out with a question for the panelists: Does this campaign season matter? Are we learning anything about the candidates? I was in the audience, but my response would be: Yes, it matters, and we’re learning a great deal. But it’s mostly about what the Republican Party really thinks.

While this election season may appear gaffe-tastic, the most viral moments weren’t misspoken words. Rather, they reveal what’s deep in the conservative heart—opinions that many had warned existed for a long time (and had even appeared in real-life legislation) but have now been put into stark relief for the general public. This election season has been highly instructional about deep-seated beliefs on the right.

The latest and perhaps most viral—nabbing Mother Jones, which broke the story, over 8 million visitors—was Romney’s now-infamous hidden camera 47 percent comment. Here’s what he said:

There are 47 percent of the people…. who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what… These are people who pay no income tax. Forty-seven percent of Americans pay no income tax…. And so my job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.

Romney has stood by his comments, with his economic adviser swearing to “triple down” on them. And in fact the ideas he expresses are nothing new to the party. Worse, given the candidness of the moment, Romney expressed what can only be characterized as unabashed disdain for half of the country. It’s not just that he’s worried, as the conservatives who cling to the 47 percent figure explain, that this constituency won’t vote for tax cuts and instead will vote for higher social safety net payouts. He dismisses them entirely because he can “never convince them they should take personal responsibility and care for their lives.”

What that sentiment leaves out, of course, is that while these Americans didn’t pay income taxes (thanks to many policies pushed into law by Republicans themselves), it doesn’t mean they don’t pay any taxes. Over 60 percent of them paid payroll taxes, which means that they also held jobs. Nearly everyone pays sales tax. Another 22 percent of this group was elderly. Add that up, and what he’s mostly talking about are the working poor and low-income older Americans. These are the people that Romney dismisses as taking no responsibility for their lives.

Far from an outlier, Romney’s statement has a long, long history. As my colleague at the Roosevelt Institute Mark Schmitt pointed out last week, this narrative around the 47 percent was hatched in the lab of the American Enterprise Institute. It’s been spouted by the likes of Rick Perry, Michele Bachmann and Republican VP pick Paul Ryan himself. But Romney’s remarks revealed an even more deep-seated disdain for the working poor than is normally expressed. It’s not just about taxes; it’s a belief that those at the bottom are worth less of his attention and care than the rest of the country. So much for compassionate conservatism. Romney’s remarks revealed once and for all that there is a deep disrespect for working-class and low-income people struggling to get by thriving at the heart of the Republican Party.

And it sheds light on another comment of his that blew up not so long ago: “I’m not concerned about the very poor.” At the time, the quote seemed a bit out of context, because Romney continued, “We have a safety net there. If it needs repair, I’ll fix it.” Yet in his hidden-camera moment, he makes it clear just how much he despises the safety net he says should catch the poor. He scoffs at those who require assistance for healthcare, food and housing, some of the most basic provisions that this country is supposed to ensure those who are at the bottom of the income scale. Yet another moment of clarity, made even clearer by his recent comments.

We’ve seen some other very telling moments from the Republican nominee this cycle. There was “Corporations are people, my friend,” an unabashed and straightforward articulation of the conservative ethos that fueled the Citizens United Supreme Court ruling. Then there was the telling, fully five-second silence from Romney aides when asked whether he supports the Lilly Ledbetter Act, exposing discomfort with equal pay legislation.

But it’s not just the presidential candidate who has haphazardly revealed truths. Just last month, before we were talking about the 47 percent, we were talking about “legitimate” rape. Remember Todd Akin? Who could forget? On a random Sunday in the middle of August, Akin told a TV interviewer, “[F]rom what I understand from doctors [pregnancy from rape] is really rare. If it’s a legitimate rape, the female body has ways to try to shut that whole thing down.” Just like Romney, Akin refused to apologize for the meaning behind his words, explaining he merely meant to say “forcible rape,” not “legitimate rape.”

But this wasn’t the first time he—or the Republican Party—used the word “forcible” to categorize rapes that count and those that don’t. Akin co-sponsored the No Taxpayer Funding for Abortion Act in early 2011, which would have tightened the definition of rape for abortions that are covered by the federal exception to only “forcible” ones. While some noticed this at the time, Akin’s remarks made it crystal clear to anyone half tuned in that the Republican Party thinks some rapes count and others don’t. In particular, if you weren’t roughed up when you were raped—if you were drugged, or date raped, or the victim of incest—you weren’t “really” raped.

There are other truths that surfaced about the conservative view of reproductive health. Primaries are often a process of learning, as more marginal candidates push the mainstream ones to address issues they normally wouldn’t. And right on cue, Rick Santorum made birth control, an issue many thought was settled, a debate point. Perhaps his views were made clearest by an interview with the Christian site Caffeinated Thoughts, in which he warned of “the dangers of contraception,” calling it “not okay.”

Shortly after, Irin Carmon summed up his position thus: “Rick Santorum is coming for your birth control.” In fact, conservative opposition to not just abortion, which continues to be a polarizing topic, but birth control, which does not, has been building for quite some time. But many have been in denial—Carmon herself got a wave of pushback for the title of her piece. And yet months later, contraception was once again in the news as the Catholic bishops came out swinging against the Obama administration’s decision to mandate co-pay-free coverage of contraception as part of the ACA. And we all remember what happened next—the fight devolved into Rush Limbaugh calling Sandra Fluke a slut for talking about (her friend’s) contraception needs. The cat is out of the bag: the GOP thinks using contraception, which virtually every woman will do in her lifetime, makes you a dirty whore and doesn’t support increased access.

These awkwardly worded statements and admissions of belief in what candidates assumed were safe spaces are hugely important. It may seem ridiculous that a hidden camera video can fuel three weeks of the news cycle. But what Romney revealed was more than an ability to keep putting his foot in his mouth. Republicans, perhaps more than ever, have exposed long-held beliefs this campaign season. They’re just finally going viral.

 

By: Bryce Covert, The Nation, September 25, 2012

September 27, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

Not So “Friendly’s”: Tax Avoidance, Government Dependency, And Mitt Romney’s Boca Raton Host

Amid the ongoing uproar over Mitt Romney’s snooty remarks at a Florida fundraiser concerning the “47 percent” who pay no federal income taxes, the party’s high-rolling host hasn’t drawn quite as much attention as he deserves. As the head of private equity firm Sun Capital Partners, Marc Leder is a longtime associate of the Republican nominee – and a practitioner of the same dubious behavior that has smudged Romney’s reputation.

Lately Leder has been dogged by tabloid headlines recounting his nasty divorce and wild partying (replete with reported nudity and public sex around the pool at a summer house he rented on Long Island’s East End for $500,000). What he has in common with Romney, however, isn’t a taste for bacchanalian revels, of course, but a record of business and taxation practices that working Americans might find troubling.

At the moment, Leder is under investigation by New York State Attorney General Eric Schneiderman, who subpoenaed internal records from Sun Capital, Bain Capital, and several other private equity giants last July. Issued by the Attorney General’s taxpayer protection bureau, the subpoenas were evidently designed to probe whether Leder and other executives had misused “carried interest,” a method of reducing tax liability by converting management fees into investment income — which is taxed at the lower capital gains rate of 15 percent that keeps Romney’s taxes lower than the rate paid by many middle-income families. (Tax analysts say that Bain Capital records released last August indicate that the firm may have saved more than $200 million in federal taxes thanks to the carried-interest maneuver.)

If Leder did benefit from such aggressive practices, he would merely be typical of an industry where tax manipulations are not just widespread, but fundamental.

Equally common in private equity is profiting from bankrupted companies in which other stakeholders – especially workers and government – are left to cope with the loss. During the Republican primaries, Romney’s rivals helped to make Bain notorious for such practices – and his fundraiser Leder seems no different.

Although roughly 25 firms held by Sun have gone bankrupt, perhaps the best known example involves Friendly’s, the family restaurant and ice cream chain that went under at the hands of Sun Capital in 2010 after more than 70 years in business. After acquiring Friendly’s in 2007 for a premium price, Sun took the company into bankruptcy only three years later, supposedly due to rising milk prices.

But the Pension Benefit Guaranty Corporation – the federal agency that insures benefits to workers victimized by failed corporate pension plans – accused Sun of sinking Friendly’s to dump pension costs onto the government. By pushing the company’s pension burden onto federal taxpayers, who fund the PBGC, Sun could then reorganize Friendly’s in bankruptcy, get rid of laid-off workers and less profitable restaurants, and – as Romney likes to say – give the company a “turnaround.” So far, that is precisely what Sun appears to doing, and getting away with it.

So there on the videotape shot in Leder’s huge Boca mansion stood Romney, complaining about the income taxes that the working poor don’t pay and their dependence on government assistance, while the host surely nodded in agreement. At $50,000 a plate, the lobster was garnished with a nice helping of irony.

 

By: Joe Conason, The National Memo, September 24, 2012

September 25, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

“A Luxury Reserved For The Wealthy”: Taxes Are Not A Charitable Donation

Almost all federal taxpayers who itemize their charitable deductions on their returns deduct the full amount, in order to keep their tax burden as low as possible. Mitt Romney didn’t do that in 2011, according to tax returns released today, leaving $1.8 million un-deducted so he could tell voters he paid a federal tax rate of at least 13 percent. That’s a luxury reserved only for wealthy politicians who can afford to pay an extra few hundred thousand for image purposes.

But one unfortunate line on a memo from Mr. Romney’s lawyer, accompanying the tax returns, suggests that Mr. Romney really doesn’t see much difference between giving to charity and giving to the government.

“Over the entire 20-year period, the total federal and state taxes owed plus the total charitable donations deducted represented 38.49% of total AGI,” the memo said, referring to Mr. Romney’s adjusted gross income. In his mind, apparently, you can just add up the two figures into a new hybrid column, perhaps called, Total Obligation to Society, and make yourself look even more generous.

It doesn’t work that way, however; charity and taxes cannot be conflated to make it sound like you are “giving away” a larger portion of your income than you are. Conservatives can hate paying taxes, and Mr. Romney in particular appears to hate having tax money spent on the “dependent class,” but that doesn’t make the government a charity.

Taxes represent the obligations citizens have to each other and to society, fostering physical safety with defense and law enforcement spending, economic safety with public works, and personal welfare for the needy. Charity is entirely voluntary, even for those who, like Mr. Romney, are asked by their religious authorities to tithe a fixed portion of their income. Those donations play a vital role in every American community, but they can never take the place of a firm government safety net, as much as they are preferred by the right to taxes.

One would think that someone running to be the government’s chief executive would be proud to make tax payments, and would not try to reduce them through exotic foreign tax shelters and an outsized IRA, as Mr. Romney has done for years. But the announcement today that he had deliberately “overpaid” his taxes was grudging and entirely for show. He overpaid them only so that he couldn’t be accused of paying far less before the election.

Despite his accountant’s statement today that he had never paid less than 13.66 percent of his income in taxes over the last 20 years (a level that would make many middle-class taxpayers jealous), it is still an assertion that has not been backed up by the release of actual tax returns for that period. For all the highly trumpeted discretionary donations he has made, Mr. Romney apparently still doesn’t want the public to see how assiduously he has worked to lower his most important social obligation.

 

By: David Firestone, The New York Times, September 21, 2012

September 23, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

“A Political Pickle”: Conservative Media Tries To Save Romney’s Campaign

Mitt Romney sure is lucky that major media outlets exist to serve his interests. After a video came out on Monday afternoon in which Romney denigrates the nearly half the country that did not pay federal income taxes last year as irresponsible and entitled, it seemed he was in quite a political pickle. The comments were unlikely to endear him to swing voters who perceive Romney as an out-of-touch elitist. But since Romney got the idea that 47 percent of the country are lazy Democratic moochers from movement conservatives, he could not repudiate his own remarks.

At first, Fox News had no idea how to respond. They simply ignored the story, even as it dominated coverage on other networks, all through their primetime lineup on Monday. Finally, when Romney gave a press conference after 10 pm, in which he admitted to having made poor word choices but not a substantive error, they showed it. On Tuesday, the Fox Business network hosted Romney for a softball interview with Neil Cavuto. Fox was determined to avoid covering the story except to help Romney burnish his self-defense. Alas, Romney himself did not have much of a defense, other than to say that he had simply been acknowledging that he will not win a landslide victory.

But then, Providence struck. On Tuesday afternoon the Drudge Report released an audio recording from 1998 in which Barack Obama says, “I actually believe in redistribution.” Drudge splashed the phrase in a banner headline across his front page as if it were earth shattering news. Since then, according to Huffington Post media reporter Michael Calderone, Fox has played the audio clip twenty-two times.

The Romney campaign immediately seized on the clip as a way of shifting their defense of Romney’s unappealing rhetoric into more friendly terrain. Speaking to Cavuto, Romney said:

There is a tape that just came out today where the president is saying he likes redistribution. I disagree. I think a society based upon a government-centered nation where government plays a larger and larger role, redistributes money, that’s the wrong course for America…. The right course for America is to create growth, create wealth, not to redistribute wealth.

Romney’s campaign sent out the quote as part of a press release. They followed up shortly with another press release that lists their usual litany of depressing economic indicators as proof that “Obama’s redistribution plan…didn’t work.” What is missing is any proof, besides a fourteen-year-old quote, that Obama actually pursued a redistribution plan once in office.

By Wednesday, the Romney campaign had regained its footing. Reporters were being inundated with statements using the redistribution quote as a hook for all their usual talking points. For example, they released a statement headlined, “Obama’s Redistribution Didn’t Work For Small Businesses.” “Mitt Romney understands that opportunity and free enterprise create jobs and grow our nation’s small businesses—not government redistribution,” said Romney campaign spokesperson Andrea Saul. The campaign also worked the phrase into their stump speeches. Paul Ryan told a Virginia audience that, Obama is “going to try and distract and divide this country to win by default.” Then he asserted:

President Obama said that he believes in redistribution. Mitt Romney and I are not running to redistribute the wealth. Mitt Romney and I are running to help Americans create wealth. Efforts that promote hard work and personal responsibility over government dependency are what have made this economy the envy of the world.

As Slates Dave Weigel points out, it is ridiculous to blame Obama for distracting and dividing the country, and then attack Obama for something he said fourteen years ago.

Conservative pundits, though, are cheering on the Romney/Ryan campaign’s silliness. After Romney’s appearance on Cavuto, Fox panelist and Weekly Standard writer Stephen Hayes said of the attack on Obama’s quote, “[It’s] good, [he should] make the argument. Going back to 1998 shows the president has believed this for a long time.” That’s a specious argument. If you go back to 1998 and look at anything Mitt Romney said, it may be diametrically opposed to what he believes today. Generally, the older the quote, the less relevant it is. Certainly that’s the standard Hayes would use if it were Romney who long ago said something Hayes considers damaging.

More importantly, Ryan’s statement creates two false dichotomies. Contra Ryan, redistribution can promote hard work instead of government dependency. A great example is the Earned Income Tax Credit, which is a wage subsidy for low-earning households. The purpose is to make menial jobs more financially attractive relative to being unemployed and eligible for welfare, food stamps and Medicaid. It was created with bipartisan support, and by all accounts it has worked well. It also happens to be one reason that so many low-income families do not pay any income taxes, the very state of affairs that Romney decried.

It is also wrong to assume that any wealth redistribution is the opposite of creating wealth. Reasonable people can differ on the optimal amount of redistribution to generate economic growth. But a glance at countries such as Denmark and Germany shows that high marginal tax rates, with the revenue going to strong educational and healthcare systems can develop a healthy, educated and therefore globally attractive workforce. That, in turn, can yield strong rates of economic growth.

The underlying complaint against Obama is bogus anyway. Drudge misleadingly cut the quote to create a false impression. As Jonathan Chait explains in New York magazine, if you read the full quote, you see that Obama is actually expressing a very moderate, neoliberal attitude. Obama actually said that some of the backlash against government has been deserved. To revive faith in collective action, Obama argues, government programs must be more efficient. “We do have to be innovative in thinking, what are the delivery systems that are actually effective.… because I actually believe in redistribution, at least at a certain level to make sure that everybody’s got a shot,” said Obama. This is not radical socialism. But then, neither is the Affordable Care Act, even though conservatives have labeled it as such. If Romney’s incompetent campaign did not have the conservative media to invent these myths, they would truly be lost.

By: Ben Adler, The Nation, September 19, 2012

September 22, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

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