Harold Meyerson
Opinion writer May 28, 2013

The open secret of many global corporations’ success — and occasionally, downfall — is to fall between the cracks. Apple, which is based in Cupertino, Calif., created an Irish subsidiary with no employees, into which it funneled roughly $30 billion between 2009 and 2012 on which neither Ireland nor the United States levied taxes. Then there is American International Group (AIG), the New York-based insurer, whose London office sold insurance policies on derivatives that the company lacked the funds to redeem when banks demanded their money during the 2008 financial meltdown. The U.S. government was compelled to fork over a guarantee of $85 billion — which eventually expanded to $182 billion in taxpayer dollars — to keep the banks in business. Neither U.S. nor British regulators kept an eye on AIG’s risky practices as it rose. Only as it plummeted, threatening to drag the global economy down with it, did regulators notice that AIG’s London office operated in what was effectively a regulation-free zone.

All of which is to say that the system of sovereign nation-states — a pretty impressive creation in its day — has become a plaything for big business in the age of globalization and digital communication. The world is full of places with dirt-cheap labor, low or no taxes and scant or ­non-existent regulation. It’s also full of jurisdictional gaps between and among nations — as Apple discovered to its glee, and AIG to its woe.

Harold Meyerson writes a weekly political column that appears on Thursdays and contributes to the PostPartisan blog. View Archive

The legal evasion of corporate taxes by shifting income to low-tax climes isn’t only a U.S. problem. Low-tax trolling is on the agenda of the Group of Eight leaders’ meeting next month. But absent a global sovereign, there will always be countries with tax rates lower than their neighbors’ and companies seeking to take advantage of that disparity. Reducing the nominal tax rate on corporate profits in the United States to 25 percent, or 15 percent, from the current 35 percent won’t deter some future Apple from shifting profits to some future Ireland if the tax rate there is zero.

So, what to do? A number of economists favor abandoning corporate taxes altogether and raising taxes correspondingly on shareholders’ dividends and capital gains. Raising those taxes is long overdue in any case, as those rates are much lower than the rates on income from work. In an era when investments in U.S. corporations are as likely to generate jobs abroad as at home, the preference given to capital income over labor income makes no sense — unless the policy goal is simply to favor the rich.

But, as F. Scott Fitzgerald famously said, the rich are different from you and me: They have more political power. It’s hard to imagine Congress — even a more morally and economically sentient Congress than the current one, which is not hard to imagine — raising the tax rate on capital income to the point that it covers the revenue loss caused by abolishing corporate taxes.

There may, however, be another solution: taxing corporations on their revenue rather than their profits. If Apple gets 60 percent of its revenue from sales in the United States, Apple should pay U.S. taxes on that revenue. Let France collect taxes from Apple on its sales in France, China on its sales in China and so forth. Taking production and the location of corporate headquarters out of the equation would end the noxious practices of placing factories where the taxes are lowest and creating dummy subsidiaries to funnel profits through low-tax countries. Companies would still roam the globe in search of the cheapest labor, though a better Congress might one day seek to reward businesses for keeping and generating high-value-added jobs in the United States.

Taxing companies on sales instead of profits would have its own complexities, of course. Last year, RBC Capital Markets found that the companies listed on the Standard & Poor’s 500-stock index sell nearly half their products abroad, so the tax rate on U.S. sales would have to be sufficiently high to make up for lost revenue (not that any company would contemplate abandoning the massive U.S. market). Moreover, a corporation can have high sales revenue and still have a bad year. But shifting from taxing profits to sales is basically a recalibration of the cost of doing business — and one that would put an end to rampant tax arbitrage.

Ultimately, what’s needed are global standards for taxes, labor and regulation. Until they exist, let’s do what we can to stop game-playing that benefits only the rich.

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