The richest of the rich are different from you and me because instead of paying taxes, Congress lets them pay interest.
This little-known difference was on full display before the Senate Permanent Investigations subcommittee this week, though you would hardly know that from the news reports of testimony by Apple CEO Tim Cook and his top finance and tax executives.
The reality is that America has two income tax systems, separate and unequal. And as with all such separate and unequal systems, the powerful benefit by sticking everyone else with the costs.
The system is so unequal that corporate tax departments at the biggest multinationals have been transformed from cost centers into what Enron called its tax office: a profit center.
To most Americans, taxes are an expense. The idea that a tax can make you richer may seem hard to believe, but as the Apple executives showed in their testimony, it is standard operating procedure these days.
But instead of reporting this, we got mostly fluffy political stories. The New York Times account was typical, focusing on how Cook so charmed senators he had them “practically eating out of his hand.”
What Apple is really doing is eating your lunch.
Let’s start with how Congress taxes most people. It does not trust them to report their incomes in full or to pay their taxes, and with good reason since numerous studies show that a third or more of self-reported income simply does not get written down on income tax returns.
We all know this as the “underground economy” of people who get paid in cash; clean pools, cut grass or sell another type of grass. (Many drug dealers, however, report their incomes in full knowing that if they get caught dealing and cheating on their taxes their prison terms will be longer.)
People who work, and pensioners, have their taxes taken out of their checks before they get paid — which is why we call the shrunken cash that we pocket “take-home pay.”
Because Congress also does not trust workers and retirees to report their incomes in full, it requires their employers and pension plans to verify how much they make. The Social Security Administration adds up all the W-2 wages-paid forms for people with any paid work. In 2011 there were 151,380,759 people who earned $6,238,607,249,941.26, which would usually be written up as $6.2 trillion.
Congress also says you can defer tax on money you save in a 401(k) plan if your employer offers one, a maximum of $23,000 for older workers. If you do not have a 401(k) you can save no more than $6,000 this year and pay taxes when you withdraw.
In other words, you get fully or almost fully taxed when you earn.
But Apple operates under very different rules. At the end of March it has more than $102 billion of mostly untaxed profits. If Apple were a worker it would have paid the federal government $36 billion in taxes.
Instead of paying taxes, Apple has taxes that are deferred for as long as it chooses.
In total, I estimate from corporate disclosure documents, American multinational companies have $2 trillion of untaxed profits offshore because they did just what Apple has done.
Had Congress required those companies to pay up last year it would have been the equivalent of all the income taxes paid by everyone in America from January until July 10. Imagine that, all the income taxes taken out of your pay or pension from January into the middle of summer just so Apple and other multinational companies can profit today and pay their taxes someday.
The $700 billion of income taxes that would have come due without deferral would also have reduced the federal budget deficit last year by more than two-thirds. Instead, the federal government borrowed a little more than a trillion last year to pay its bills.
In effect the federal government loaned Apple the $36 billion in deferred taxes at zero interest. Imagine how rich you would be if you could keep all the income taxes withheld from your paycheck this year and then pay the money, interest-free, 30 years from now.
Because taxes deferred are at zero interest, inflation erodes the value of the taxes owed. If Apple waits 30 years and then chooses to pay its taxes the government will get the equivalent of 40 cents on today’s dollar, assuming 3 percent annual inflation.
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