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A World of Rotten Tax Laws

A Commentary by Froma Harrop

Tuesday, May 28, 2013

Guy writes a film script full of four-letter words. But when the actors repeat them, he gets all huffy about the dirty language. An absurd reaction, wouldn't you say? But it's not so different from the scene in which our lawmakers scold corporate chieftains for exploiting tax loopholes their legislatures helped create.

There was no little "theater of the absurd" in calling Apple Inc. CEO Tim Cook on the senatorial carpet to explain himself. Apple's clever tax lawyers had created a scheme whereby the company managed to declare itself almost stateless when it came to paying taxes. The strategy let it shuffle revenues to offshore tax havens and escape paying billions in taxes at home.

Here's how it worked in a nutshell: Irish law says taxes are paid where contracts are signed, even if the actual sales take place in other countries. So Apple booked worldwide business at Apple Operations International in Ireland.

Meanwhile, Ireland's corporate tax rate of 12 percent is lower than America's top rate of 35 percent. And Apple managed to extract an even lower 2 percent rate from the Irish government. Though AOI was controlled from the United States, Apple used it to dodge $9 billion in U.S. taxes last year.

As Cook told the senators: "We pay all the taxes we owe, every single dollar. We not only comply with the laws, but we comply with the spirit of the laws." 

It's not alone. Google, Amazon and other famous American brand names have their own tax avoidance strategies.

Would the world's business media please stop using terms like "legal but ethically dubious" to describe such practices? Now, a company marketing its products as "designed by Apple in California" might blush a bit over its herculean efforts to avoid supporting the civilization that made its success possible. Let's not pin a medal on Cook's chest.

But law, not ethics, governs the payment of taxes. A company has no moral duty to pay taxes it can legally not pay. Same goes for individuals. I think the deduction for mortgage interest is unfair and ought to go. But do I take it? As long as it's legal, you bet.

Cook was right to call for ending the loopholes and lowering America's corporate tax rate. That would be good for the U.S. Treasury, good for most companies and good for the civic health of the country.

This ancient idea has gone nowhere for a simple and depressing reason: We are asking our Congress to fix a tax code off which its members raise tons of money in campaign contributions and secure future employment.

Other countries can join us in closing the international tax loophole bazaar. Britain, France and Germany are likewise angry at tax avoidance deals -- not only that offered by Ireland, but bank secrecy services provided by Austria, among others. Europe loses an estimated $1 trillion a year from tax dodging.

Britain's conservative prime minister, David Cameron, has vowed to discuss such concerns at the Group of 8 meeting scheduled next month in Northern Ireland. Google is under fire in Britain for selling almost $5 billion in product in 2011 while paying only $9 million in corporate taxes -- thanks in good part to its use of the Irish tax refuge.

Exotic tax avoidance schemes flourish in chaos. To make the world fairer for companies that don't game the tax laws and workers who can't, our lawmakers must cooperate with each other and with foreigners to clean up the debris.

Can we expect them to pass up lobbyist checks and do what's right for the country?  Yes, if the voters start paying attention.

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