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Apple Case Highlights Need for Corporate Tax Reform

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Yesterday, on May 21st, Apple CEO Tim Cook and two other executives were summoned before the Senate Permanent Subcommittee on Investigations, where they were thoroughly chastised by many from the majority party for the company’s use of offshore strategies to reduce its U.S. tax burden.

The interrogators did not ever contend that Apple had been operating illegally, but rather the committee focused on the fact that the company, in the words of Sen. Carl Levin (D-MI), “has a highly developed tax avoidance system.”

Levin went on to blame corporations like Apple, who do what they can to lower their tax burdens, for the out-of-control, $642 billion federal deficit.

"There is a direct relationship between this rapidly accelerating shift of corporate profits offshore, on the one hand; and on the other, a worrisome federal deficit fed in part by a decline in the contributions corporate taxes make to federal revenue. Corporate income tax revenue has accounted for a smaller and smaller share of federal receipts, and today is down to about 9 percent of federal revenue.”

While the U.S. tax code is indeed absurdly complex, how can politicians get on a high horse and berate companies like Apple who provide plenty of tax revenue and economic activity despite a record-setting recession and the U.S. now boasting the world’s highest corporate tax rate?

Is it really fair to blame Apple, when the company itself is likely the largest corporate tax contributor, shelling out a far-from-modest $6 billion in federal income taxes last year?

If the tax code were less burdensome and laborious to navigate, companies like Apple wouldn’t need to devote such resources to working through our overcomplicated tax system, and could instead focus on what they do best: creating valuable electronics while employing thousands of people.   

In his defense of the company’s practices, Apple CEO Tim Cook seemed to be echoing this sentiment, even laying out his own proposal for a simpler and fairer tax system, as USA Today reported:

Cook also sketched a proposal for a revenue-neutral simplification of federal tax laws that would lower corporate tax rates to roughly 25% and create a "single-digit" percentage tax on foreign earnings that multinational U.S. firms bring home to use for job creation and economic investment.

Corporations, contrary to the anti-business rhetoric constantly espoused by some politicians looking to blame federal deficits on business instead of taking responsibility for their addictions to spending other people’s money, are not in fact the enemy of taxpayers or consumers. This situation involving Apple illustrates this point, and makes the argument for a simplified and reduced corporate income tax all the more urgent.

NTU has long advocated for lowering and simplifying the corporate tax rate. In a blog post just last month, NTU quoted the RATE coalition, a group of concerned businesses working toward reducing the corporate income tax:

"Today, at 35%, the top federal statutory corporate tax rate is 10 percentage points above the OECD average and nearly 15 points higher when state and local taxes are included,” says the letter, referring to the 34-nation Organization for Economic Cooperation and Development, and signed by 21 CEOs. "The costs to our economy are significant and already being realized. According to a new Ernst & Young study, GDP in 2013 is expected to be between 1.2 and 2.0% lower as a result of our OECD-leading corporate tax rate. Simply put, the U.S. can no longer afford to stand still."

Not only do high corporate tax rates take a serious toll on our economy, the perverse incentives created by our burdensome and complex system actually produce less revenue, despite record-high rates. NTU Vice President of Government Affairs, Brandon Arnold explains in the Washington Times:  

Eliminating all corporate-tax deductions and credits would produce enough revenue to lower the rate to 28 percent without adding to the deficit. Counter-intuitively for the tax-and-spend group: Those seeking to increase revenue should, in fact, advocate for even lower rates. According to research by the Tax Foundation, reducing the rate further to 25 percent would increase gross domestic product by 2.2 percent and raise federal tax revenue by 0.8 percent.

Combining such tax reform with serious spending cuts is the only way to tackle the deficit Sen. Levin was so concerned about, while encouraging a more prosperous economy.