By Haddon Libby
Where the Bible uses 700,000 words to give guidance, the U.S. tax code needs 3,700,000. It was only 100 years ago when the federal tax code was 400 pages in length. Today, it is over 70,000 pages long.
This year, it is estimated that Americans will spend over $30 billion doing their taxes or nearly$100 for every man, woman and child, not to mention the billions spent by corporations. As the Supreme Court has ruled, corporations are people, too, that owe taxes. The primary difference is that corporations wield the power, influence and finances to find ways around a voluminous tax code that is undecipherable to the average person.
As an example, Apple, one of the most successful companies in the world, is currently building a $1 trillion ‘headquarters’ in Cupertino. The thing is that their ‘real’ headquarters moved to Dublin, Ireland in the 1980s. By doing this, Apple reduced their corporate tax rate to 12.5% versus a much higher rate here in the United States. This structure meant that Apple-Ireland owned all Apple patents and Apple-US leases those patents for use in the devices that they make in China. As Apple didn’t want to pay Ireland 12.5% on all of those profits, they set up another company, Baldwin Holdings, in the Virgin Islands where most of the income is stockpiled tax-free.
By doing this structure, Apple gets all of the benefits of a company doing business in the United States without most of the tax implications…not to mention the lower employee costs that building their devices in China affords them.
Offshore manufacturing points out one of the odder federal tax breaks that provide incentives to companies that move jobs out of the United States. While Democrats tried to eliminate this loophole with the Bring Jobs Home Act, the GOP squelched the Act with Senator Orrin Hatch (R-Utah) calling the effort “a joke.”
Most companies that stay in the United States avoid the taxes of their home states by setting up Delaware corporations. Delaware has nearly 1,000,000 corporate citizens which is 100,000 more than the living, breathing variety. Over the last decade, companies have avoided well over $10 billion in state taxes through the use of these Delaware-based corporate shells.
While the unemployed have to pay taxes on unemployment benefits, corporations that get subsidies to do business in one state over another are exempt from taxation on that government support. As an example, Texas got a California-based assembly plant to move to their state in return for $227 million in tax subsidies. This meant that Texans paid $110,000 per job to take the jobs of California workers. While Texas was better off, American workers ended up making less for the same work.
The best example of a company profiting at the expense of the communities that they do business in is Wal-Mart, one of the largest employers in the United States. The American taxpayer subsidizes every Wal-Mart worker by $1,000 on average.
As for corporate tax rates, the United States at 39% is only exceeded by the UAE (55%) and Chad (40%). The average corporate tax rate in the world once weighted for Gross Domestic Product is 30%. When you consider the loopholes in the US tax system, our rates are on par with or lower than most of the developed nations of the world.
If we are going to ‘make American great again’, our elected representatives need to begin looking out for you and me. As the often ridiculed and ridiculous Presidential candidate Donald Trump has accurately said, free trade is not smart trade. Making things worse, our tax code codifies a system rigged against the American worker.
Haddon Libby is Managing Director of Winslow Drake, an investment advisory firm and can be reached at 213.596.8399 or hlibby@winslowdrake.com
