“So Many Secret Accounts”: Republican Doom Talk Helps Enable Big-Time Tax Evaders
So the first impulse is to discuss these Panama Papers in terms of the big crooks like Valdimir Putin. But let’s hope they get some traction on the presidential campaign trail and put the issue of tax havens at the center of the debate.
Yeah, we all know about Swiss banks and the Cayman Islands, and just figure that rich people have this wired and this is how it will always be. But it doesn’t have to. In fact, it has changed a little bit for the better recently. Wanna take a guess who’s been trying to do the changing, and who’s stood in the way?
First, a little background. The best estimate for the kinds of tax havens discussed in the Panama leaks is that they drain about $165 billion a year from federal revenue coffers. Gabriel Zucman, a leading expert on them, estimates that the U.S. government loses $35 billion from individual tax evaders, and $130 billion from corporate evaders. (His new book was just well-reviewed by Ethan Porter in Democracy, the journal I edit.)
One hundred and sixty-five billion dollars is a fair amount of money—more than you and I shelled out for any of the following categories of federal expenditure in 2015: health care and health research ($122 billion), transportation ($107 billion), education ($90 billion), or science-environment-energy ($70 billion). So we could use it.
In Europe, efforts started in the aughts to do something about this. The Bush administration wasn’t going to do much, of course. But after Barack Obama came in and the Democrats had control of both houses of Congress, Democrats—notably Michigan Sen. Carl Levin, but others too—sought to move legislation to address tax evasion.
And… they did! You probably didn’t hear about it at the time, because the effort didn’t generate nearly as many headlines as the Democratic effort to reform the financial system, address climate change, or pass a health care reform law. But note: The Democrats used their brief two-year period of total control of both the White House and Congress to address head-on about a half-dozen problems, and tax evasion was one of them.
The bill was called the Foreign Account Tax Compliance Act, or FATCA; how they managed not to tag that final “T” on there at the end is beyond me, someone was really asleep at the wheel. But anyway it passed. In the Senate, it actually enjoyed a modicum of bipartisan support, as 11 GOP senators voted for it (as opposed to 28 who opposed; Democrats backed it 55-1). But in the House, not a single Republican voted for the bill, as Nancy Pelosi let 38 nervous blue-dogs go and join all 174 Republicans.
So what did the bill do? Well, a lot of complicated things, some good, some bad, but in the main, it gave the IRS more authority to look abroad through global financial databases and figure out who might be a U.S. citizen and if so, what they might be owing Uncle Sam that they weren’t paying. It also required foreign financial institutions to report such relevant information about U.S. citizen residents to the U.S. government.
Sounds like a pretty legit thing for the government to be doing, if you ask me. But it involved the hated IRS, so naturally, you had all these hideous predictions from Republicans and conservatives about what FATCA was going to lead to. It was going to make presumptive criminals out of all U.S. citizens living abroad. It was going to compromise the privacy needs of banks. Best of all, FATCA, once fully implemented in July 2014, was going to bring about the official demise of the U.S. dollar. Snopes.com rated that one false.
The charge is being led by just the people you’d expect. Sen. Rand Paul introduced the bill to repeal FATCA, and sued the Treasury Department over it. Utah Sen. Mike Lee went on a barnstorming tour of Europe to drum up momentum for a repeal (that doesn’t seem to have to worked too well—the Organization for Economic Co-Operation and Development issued its own tax-haven enforcement guidelines, which are for the most part tougher than FATCA’s).
But it isn’t just the fringy, von Mises-y, gold-standard crowd that’s worked up about FATCA. The Republican National Committee officially passed a resolution supporting its repeal (PDF). Interestingly, I looked at the RNC’s official resolutions from 2013-2016 inclusive, and for those four years, FATCA is the only piece of legislation singled out for a specific resolution of repeal. If that’s the case, FATCA must be doing something right.
FATCA and the OECD regs represent first steps in a process that’s going to take 20 or 30 years, if it succeeds even then. And the Democrats of course aren’t perfect on this. But at least most of them acknowledge this as an issue and are trying to do something about it.
On this point, I feel certain you’re going to be reading this week a lot about how Hillary Clinton supported a free-trade deal with Panama, the notorious tax haven whence these leaked documents came to us. This is true, but as a secretary of state working for a president who backed the deal, she could scarcely have done otherwise. And two other points are salient: one, trade deals are negotiated by the U.S. Trade Representative, not the Department of State, and two, the USTR did seek and obtain a tax information exchange agreement before the Obama administration was willing to cut the deal with Panama.
Obama’s not the enemy here. Nor is Clinton. The people on the wrong side of this one are the same people who always are, and whose dire predictions of economic catastrophe, whether about this or raising the minimum wage or anything else, almost never seem to come to pass.
By: Michael Tomasky, The Daily Beast, April 5, 2016
“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
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