What to do about corporate taxes

There are ways to fix the U.S. tax policy for companies

Nobody likes paying taxes, but American CEOs in particular seem to be adept at finding new ways to minimize corporate taxes. As an example, consider the computer giant, Apple, which has enjoyed an incredibly low tax rate by basing its European operations in Ireland and is facing a record tax penalty as a result.

In short, the European Union has accused Ireland of giving Apple special "sweetheart" tax rates that violated the European Union's state-aid rules. According to these rules, EU countries are not allowed to give special deals to one company over another; every corporation should be paying the same tax rates. Instead, Apple only paid an effective tax rate of 1 percent in 2003 and 0.005 percent in 2014. This underpayment to Ireland amounted to $14.5 billion or $13 billion Euros, not including interest.

Apple's CEO Tim Cook is indignant about its tax bill, claiming that Apple complied with the appropriate Irish tax laws and says the company has the support of the Irish Finance Minister Michael Noonan. Ireland doesn't even want the $14.5 billion it's reportedly owed, since it could threaten the country's reputation as a haven for U.S. companies seeking tax relief. Ireland has attracted a lot of business from U.S corporations since 1982, largely because of its low corporate tax rate.

The appeal process is underway and could take three to five years to resolve. Investors weren't all that concerned about the news, as evidenced by Apple stock dropping less than 1 percent the day that the ruling was announced. Apple can certainly afford to pay these back taxes, with $232 billion in cash on hand- but that isn't really the point.

Apple wouldn't be in this predicament in the first place if U.S corporate tax rates weren't among the highest in the developed world. In order to avoid paying the U.S. corporate tax rate of 35 percent, corporations move critical operations overseas to countries with much lower corporate tax rates.

There has been plenty of discussion about how to address America's burdensome corporate tax policy. Two potential options include taxing profits made overseas by U.S corporations and limiting the tax deduction on corporate bond interest to 65 percent.

Currently, U.S corporations can defer taxes on money they make overseas indefinitely, which as mentioned earlier, is exactly why Apple is holding 92 percent of its cash outside the United States. Eliminating this deferral would make it less attractive for U.S. firms to establish foreign subsidiaries.

Limiting the amount of interest companies can deduct for corporate bonds would provide significant cash to the Treasury and would also discourage firms from unnecessarily loading up on debt – an unintended consequence of this particular loophole.

According to a Brookings Institute Senior Fellow Robert Pozen, capping the interest deduction on corporate bonds at 65 percent, could lower corporate tax rates by 10 percent, from 35 percent to 25 percent.

Oddly enough, both Democrats and Republicans agree that U.S. corporate tax policy needs to be changed, and that the incredibly high 35 percent rate needs to be lowered to be more competitive, but like many issues in Congress, it doesn't appear that agreement is in the cards.

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