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Monday, July 16, 2018

Reprinted with permission from DCReport.

James S. Henry, an economist and expert on global tax avoidance, reports that the new Trump tax law gives Apple and other multinational companies a sweetheart deal—several sweetheart deals, actually—that could total as much as $2.6 trillion.

This is an important story that the mainstream news missed. We have it all because Jim—a DCReport senior editor and a contributing editor at the American Interest, where his story is also being published—actually read the tax bill and applied his skills as an economist, former executive and lawyer to analyze the tax payment terms.

You don’t get these terms. But if you did, they would sure make you a lot better off financially, though the country would suffer from huge increases in borrowing to pay our government’s bills.

The superficial story that the mainstream media covered: multinational companies like Apple will pay taxes on profits they earned in America, but stashed offshore to delay payment.

The real story is that these companies get layers of new tax breaks on profits they shipped overseas without paying any corporate income tax. When companies siphon profits out of the country they obtain, in effect, loans from Uncle Sam at zero interest. The loan is the amount of tax not paid.

Profits earned by domestic American companies are subject to a 35 percent tax. Profits that are technically–and we do mean technically–shipped offshore are taxed at a rate of zero unless and until the profits are returned to the United States.

Instead of paying a 35 percent tax on profits it earned in years past and sent offshore as interest-free loans from Uncle Sam, Apple will pay only a 15 percent tax. Some companies will pay less than 10%.

What you likely haven’t read before is that Apple and the other multinationals get eight years to pay their much-reduced tax bills. Imagine if Congress said you could pay your 2017 income taxes in installments, with no interest charge, over eight years. Sweet deal.

Apple’s reduced tax payments are backloaded. They pay a little this year and delay a big chunk until 2025.

Apple and others will pay only eight percent of the tax bill this year on profits they have earned over decades and then stashed–untaxed–in accounts overseas.

Those profits, by the way, are actually here in America, but the address on the tax deferral account is overseas, a profitable financial game Congress allows under President Reagan’s 1986 Tax Reform Act. You don’t get that deal because you are a human being, not a multinational corporation.

Not until 2025 will Apple pay the last one-fourth of the reduced tax bill it owes on profits from years past. Sweet deal, but Trump and Congress deny you the same deal.

Because of inflation and the opportunity to invest money to earn investment income, each dollar of tax paid in future years is worth less than a dollar paid this year. Jim Henry analyzed the real tax cost to Apple using standard financial measures that compare the cost of a dollar of tax today with a dollar of tax paid in future years.

Examined this way, what will be the real tax rate Apple will pay by these standard measures? Between negative 0.5 percent and two percent.

The number is a range because of assumptions about what Apple would do to invest its unpaid taxes. Jim’s analysis uses reasonable figures that may understate just how low the effective tax rate paid by Apple will go.

As an individual, your lowest federal income tax rate on your pay is 10 percent. And while Apple and other big multinationals got to defer past taxes and now get to defer them for years more, your taxes come out of your paycheck before you get your money.

The difference depends on the value of future dollars against today’s dollar. Because of inflation, a dollar of tax paid in 2025 is worth less than a dollar paid today.

By the way, have you asked Trump, your senator, or your congressperson to loan you the income taxes that are taken out of your paycheck so you can get these loans at zero percent interest?

And did you then ask them to cut your tax rate by more than half and spread your actual payments out until 2025?

Don’t bother. Trump is not going to give you that deal, though some of his companies should qualify.

Imagine how rich you would be if Congress loaned you 92 percent of the income taxes you paid over the last 30 years or so. Just investing that money would have made you rich. Then imagine Congress said you can pay the delayed income taxes in installments with most of the money due more than five years from now.

Here is the awful part–there is a cost to deals like that. Apple and other multinationals get the tax savings and investment income, you get stuck with the bill.

Jim calculated the financial benefits to Apple using extremely modest assumptions on how much Apple earns on the taxes it delays paying. Even applying the less than two percent annual return on investment Jim used, the hard math shows Apple will offset half of its final tax payment with investment earnings.

Use the return on capital that Apple tells shareholders, the company’s cost of capital is 9.6 percent. Apple will turn a huge profit on the delay in paying the taxes it has already delayed paying for years.

You can read the whole awful story, carefully and fully explained by Jim Henry here.