Timed to our delayed tax day, the Greenlining Institute has released a report called: “UNTAXED: Tax Avoidance in Silicon Valley and How America’s Richest Company Pays a Lower Tax Rate than You Do.” (PDF) The report focuses on the 30 largest tech companies in the Fortune 500, and discovers to no one’s surprise that the effective tax rate they’re paying has continued to decline.
Before I continue, a note: Greenlining acknowledges that its data is imprecise. Greenling uses a company’s “cash taxes paid,” which includes money paid from taxes for past years but also doesn’t include taxes that might be owed but are deferred from the current year. As Greenlining says:
“While imperfect, this is the best estimate of how much a company actually pays in taxes in a given year. Until the government or the Financial Accounting Standards Board requires companies to report more, this is the best figure available.”
With that in mind, the Greenlining report notes:
- “The tax rate paid by these companies has plunged – from 23.6 percent in 2009 to 19.9 percent in 2010 and 16 percent in 2011. The hypothetical top corporate tax rate of 35 percent is almost entirely a fiction.”
- “The amount of cash held overseas by these companies shot up by 21 percent from 2010 to 2011,
to just under $430 billion. Apple and Microsoft had the biggest increases in cash held offshore.”
- Regarding Apple: “With profits soaring
past $34 billion last year, the company’s tax rate fell from 24.8 percent in 2009 to 14.7 percent in
2010 and 9.8 percent in 2011.”
So how are they cutting their tax bills?
According to the report, the companies are using a combination of tactics. Primarily, they are keeping more and more cash overseas, as noted above. And that means they’re not paying U.S. taxes on it. And second, they are creating more and more foreign subsidiaries in various tax havens:
“These 30 tech companies added a net total of 51 foreign subsidiaries from 2010 to 2011.
Nineteen of these were in tax haven jurisdictions as identified by the GAO. Sixteen of the
companies had 10 or more subsidiaries in tax haven countries.”
Greenlining said it focused on tech because of its growing economic and political importance. Not only is it one of the biggest sources of job creation the last four years, but the industry collectively is now the fourth largest source of lobbying dollars on capitol hill.
The report in particular takes Apple to task, an obvious target given its rapid growth, its valuation, but also its apparent declining tax rate. Even in Apple’s annual report, it notes its “effective” tax rate has declined the last three years: ”The Company’s effective tax rates were approximately 24.2%, 24.4% and 31.8% for 2011, 2010 and 2009, respectively.”
Those are higher than Greenlining’s number, and not declining as fast, but it’s still noteworthy that in either case, the company has managed to lower its tax rate at a time when growth was exploding.
The bigger question, of course, is whether we should be outraged by this? Overall, the percentage that corporations pay toward the federal budget has declined by a shocking rate. Greenlining says: “Since the mid-1950s, corporations’ share of the federal budget has plummeted, from 27 percent to nine percent in 2010.”
Clearly, this is unsustainable, given our current deficits and the radical budget cuts being enacted at all levels of government.
Companies have tried to deflect criticism by noting that the U.S. now has the highest corporate tax rates in the world, though it doesn’t seem likely that most companies are paying them. Still, there are moves afoot to “reform” taxes and lower that rate while closing loopholes. And they’ve also been pushing for another Repatriation Act to give them a heavy cash discount for bringing back its overseas cash (which Greenlining opposes).
As for me, I think there’s a simple place to start with this: More transparency. Companies will no doubt insist that the report, and others like it, distort their actual tax burden. Fine. But the SEC should respond by requiring more transparency. Give us an actual figure that says: “Here’s what Company X paid in federal taxes.”
If we’re going to have a rational discussion about tax reform and repatriation, we need clear data as a starting point.