IBM nearly HALVES its effective tax rate in 2013 - report

Don't worry IBM ...

… and Google and Starbucks and … (enter multinational of choice recently flamed by UK for smart tax practices).

I may have a precedence setting solution for you all that may be of interest to finance, legal and (most importantly of all I think) PR departments.

Get the chequebooks ready?

Hmmm…

["To promote the long-term success of the company (rather than the interests of, say, the majority shareholder)"]

The company is its shareholders.

The company is not its employees unless those employees are also shareholders.

If the company has employees as shareholders it is usually called a co-operative no?

Usually handing over money to individuals employed by the state with no receipt or invoices for services offered is called a bribe.

It is usually delivered in brown paper bags (or so I'm lead to believe).

to the numpties

A 15% flat tax is regressive. If you don't understand that i recommend you do some reading. It's great for the 1% and not so great for everyone else and really sucks for the bottom of the rung who are struggling on a day to day basis.

Social security (in the US) was NEVER intended to be a retirement income. It was clearly earmarked as a SUPPLEMENT to your retirement income. After it was pillaged by congress, opened up to folks who never contributed a dime, added in more who didn't contribute (disabled children??? WTF).... there isn't enough to go around... what a surprise.

Here in the UK if I want to buy something with retail value of 1.00 I have to pay 1.20 because we have value added tax (VAT).

In order to pay 1.20 I need to earn it plus 20% income tax plus,say, 5% national insurance.

So in order to buy something with retail value 1.00 I pay 1.20 but have to earn about 1.50 with 0.50 of that going to UK Treasury at Whitehall (civil servants palace of luxury).

Something with retail value 1.00 has to have distributor costs and either import or manufacturing costs.

So you see here in the UK whatever we purchase more goes to UK Treasury than to retailer, distributor, manufacturer or importer and that is one reason why a heavy taxation based country does not do service to its citizens.

It does wonders for its civil service elite (mandarins take note) than it does for the nation.

As a PS: I'd guess that UK parliament influences no more than 20% of money going to UK Treasury.

Whatever guvmint decides Whitehall will use its influence over remaining 80% of Treasury income even if that runs contrary to wishes of the elected?

Fundamental Threshold Question

Leaving aside the undeniable and inescapable fact that taxation is theft, which makes this sort of tax avoidance not only NOT "morally questionable," as Hammarbtyp would have it, but perfectly legitimate and even morally OBLIGATORY once fiduciary duty to shareholders is taken into account (more on that in a moment, below), no one has yet remarked on the obvious threshold question of whether income should be taxed at the corporate level in the first place. (Taking the existence of taxes, including income taxes, as given.) It should not. "Income" should not be "recognized" -- and taxed -- until it is paid out to shareholders in the form of dividends.

(It is ironic that, in the United States at least, the people who complain that corporations do not pay enough in taxes tend to be the very same people who complain about the "legal personhood" of corporations. If a corporation is but a legal fiction and not a real person at all, how can it have income?)

Alternatively, if logic and common sense do not prevail, income MAY be taxed at the corporate level. But IF it is, then dividend payments to shareholders should not be counted as part of shareholders' income (for income tax purposes), because the income has already been taxed at the corporate level. Alternatively, if dividends ARE counted as income taxable to the shareholders, then dividend payments should (just like interest payments) be deductible from the corporation's taxable income.

One of these three expedients MUST be taken if double-counting and double-taxation (or more) of income are to be avoided. But the best expedient of the three is simply not to tax the "income" or corporations in the first place.

Why? Because without corporate income taxation, we would not have all these perverse incentives for all this silly gimmickry: investment tax credits (which are crude proxies for proper expensing of capital investment, and which inevitably misdirect capital -- subsidizing the PURCHASE of capital equipment instead of properly treating and taxing income from the EMPLOYMENT of capital equipment), accelerated depreciation and artificial inventory accounting methods (LIFO and the like), the shifting of income from one jurisdiction to another (with a lower tax rate, or none at all) via arbitrary intra-company transfer pricing, and so on. All of these economically counter-productive gimmicks exist because, and only because, governments insist on taxing income prematurely -- before it has actually been paid into the pockets of real human beings.

The urge to criticize Apple, IBM, et al. for what they are doing implicitly presupposes that, as corporations, they SHOULD be paying income tax in the first place. But the best and most economically defensible answer is that they should not. And even if the income of corporations IS taxed (which will inevitably bring with it unseemly and AESTHETICALLY objectionable practices of the sort documented in the article), fairness, logic and economics all dictate that the corporate income tax be integrated with the individual income tax as it presently is not (at least not in any jurisdiction I am aware of).

Economists have known all of this for over 50 years now -- at least since 1962, if not before. Arnold Harberger's seminal 1962 paper on the incidence of the corporate income tax gave rise to a gigantic literature on both the incidence (who actually pays it?) and the efficiency effects of the tax. Short answer: we have no friggin' clue who ACTUALLY bears the brunt or burden of the tax (customers, in the form of higher prices; employees, in the form of reduced wages and/or reduced employment and scale of the business; other suppliers, in the same way as employees; or shareholders -- who in turn may be poor workers or widows invested in pension funds as easily as they may be rich fat-cats), but we know it creates all sorts of perverse incentives for highly inefficient investments and business practices. All of this is well- and long-established, and none of it is controversial.

(There are disputes and qualifications in regard to certain ancillary or subsidiary matters of technical detail, but not in regard to any of the basic principles.)

In the face of all this, the burden is on him who would complain about corporate tax avoidance strategies -- such as the shifting of income from one jurisdiction to another via the rigged pricing of intra-company sales -- to justify the taxation of CORPORATE income in the first place. Why on Earth should Apple, IBM, or any other corporation -- **as distinct from its shareholders** -- pay an income tax rate (average or otherwise) any greater than ZERO?

. . . . .

Leaving aside the fact that taxation is theft, and therefore ALWAYS immoral, and confining ourselves to economics, I say that the shareholders should pay income tax, but the corporation itself should not.

And even those who disagree with me about abolishing the corporate income tax generally agree that we should do one or the other -- tax income that is earned through corporations at the corporate level OR at the individual level -- but not both. NO ONE defends double-taxation AS SUCH. (Although a few economists try to argue that taxing corporate income and then taxing what's left after corporate income tax a second time, when it is paid to shareholders, somehow isn't really double-taxation at all.)

. . . . .

P.S. Just in passing, for his pathbreaking analyses of the economics of taxation, and for a variety of other contributions to other subjects (including the economics of monopoly and antitrust law, and international trade theory), Arnold Harberger almost certainly deserves a Nobel Memorial Prize in Economic Sciences. He will never receive it, however, because he had the temerity to advise the government of Chile back when Pinochet was in charge.

Not that his advice on economic policy had anything to do with the policies or practices for which Pinochet is reviled, of course, but some people -- evidently including the Swedes on the Prize Committee -- just think it was too unseemly for Harberger to have anything to do with the dictator.

. . . . .

In separate posts below I shall address three issues that do not bear directly on the threshold question of whether corporate income should be taxed in the first place, but that came up in the discussion above -- in the comments before my own.

The Capital Gains Non Sequitur

Capital gains taxation SHOULD be scrapped, as Hammarbtyp remarked. But that fact has nothing to do with THIS discussion, as Uncle Ron pointed out in reply.

(And neither does Bretton Woods! What the Hell does any of this have to do with the gold standard or fixed exchange rates?)

Then again, in the context of the rest of his comment, it appears that Hammarbtyp PROBABLY meant corporate income taxation, not capital gains taxation, anyway.

Of course in that case, Hammarbtyp is even more correct -- because the case for abolishing the corporate income tax is even stronger than the case for abolishing the capital gains tax -- and relevant after all! Although the turnover tax with which he would replace the corporate income tax (or else the capital gains tax?) would raise problems of its own.

I'll not digress into ALL that is wrong with capital gains taxation. That is a complex topic, involving MANY important legal as well as economic considerations.

Suffice it for now to say that properly designing a capital gains tax so that "income" is not found to exist where in fact it is absent is very difficult. (Remember, a capital gains tax is ALWAYS part of an income tax. Capital gains are taxable only because, and to the extent that, they constitute a form of income.) By failing to index the taxpayer's "basis" in a capital asset for inflation (gain = sale price - "basis"), one can easily end up in a situation in which someone who actually has suffered a capital LOSS, in real terms, is deemed to have enjoyed a capital GAIN. By taxing him on an illusory, NOMINAL gain that is an ACTUAL loss, one is applying an EFFECTIVE tax rate greater than infinity! This is not good, or wise.

(As the taxpayer's real capital gain approaches zero while remaining positive, his effective tax rate approaches infinity. Once his real gain reaches zero, let alone becomes negative -- an actual capital LOSS -- his effective rate becomes undefined, and then negative. (He is being taxed on losses instead of gains, but not on purpose -- to penalize failure and unproductivity or anti-productivity -- and not in accord with a rate schedule that is knowable in advance so that decisions may be based on it.) That is why I chose the peculiar and mathematically impossible phrasing that I did.)

Granted, the objection I have presented goes more to indexing the capital gains tax for inflation than it does to taxing capital gains -- or not -- in principle. There are other arguments that apply against capital gains taxation per se, but they are subtler and more complicated, so I omit them here.

(They have to do with avoiding redundant, and therefore excessive, taxation of income, due to taxing the appreciation of an income-paying asset when the increased future income whose expectation is the basis of that appreciation will itself be subject to taxation -- provided of course that the expected increase in future income materializes.)

The problems that arise under a capital gains tax that is not indexed for inflation can become quite severe. I am not familiar with the British experience, but capital gains taxation surely was a major factor contributing to the anemic performance of the American economy throughout the 1970s. The problem I mentioned above of effective rates vastly exceeding 100 percent, or of even taxing people on nominal gains that were actual losses, actually manifested itself; it was not just a theoretical possibility. In times of low inflation it is a far less severe problem, but still real. (Especially for assets that have been held for several decades or longer.)

The problem of finding "optimal" tax rates cannot be separated from that of properly defining the tax base. And nowhere are the two tasks more intertwined than they are in regard to the taxation of capital gains.

Capital gains taxation is so economically destructive in practice that it is quite POSSIBLE, in principle, that it reduces collections from other taxes (including the rest of the individual income tax) by more than it takes in directly. In which case it would be better for the government's OVERALL collections to set the rate of the capital gains tax to ZERO!

Of course, there is no iron law that magically creates a discontinuity at zero. It is possible in principle that the globally revenue-maximizing rate of the capital gains tax is actually NEGATIVE, and that governments would collect more revenue overall if they were to SUBSIDIZE capital gains. (And tax capital losses?)

None of which am I advocating. Just pointing out the mathematical possibilities.

A Flat-Rate Income Tax (whether at a rate of 15 percent or otherwise)

A flat income tax rate of 15 percent is, BY DEFINITION, flat, not regressive. Provided of course that it is applied even to the first penny of income, with no initial amount of income exempted from taxation because it is deemed too small. Earl Grey's assertion to the contrary is innumerate -- contrary not only to the laws of economics, but of arithmetic!

(If you have a tax code in which all income above a certain level is taxed at a uniform rate of X percent, but all income below that level is exempt from taxation, then you do not have a true flat-rate tax. By definition you have a PROGRESSIVE tax code, with TWO rates instead of just one -- one of which is 0 percent, and the other X percent. Good or bad, progressive is not flat.

Keep in mind that there are other ways besides conferring an exemption to deal with the problem of people whose incomes fall below a certain level not being able to afford to pay the X percent income tax. The best and most obvious is a lump-sum rebate.)

And the contention of both Earl Grey and Uncle Ron that a flat tax is somehow bad for the poor is economically misinformed. A flat tax **set at the proper rate** (whatever that is, and however we would discover it) would in fact be better for the poor, and conducive to a HIGHER measure of progressivity OVERALL, than ANY non-flat alternative.

(I leave aside here such complexities as the choice among an income tax, a retail sales tax, a value-added tax, and other possible tax bases that might be considered in place of income.

Also, a flat tax set at a grossly excessive rate would be far more destructive than a mildly progressive income tax under which even the maximum rate remains reasonably low. But that is why I added the qualifying words "set at the proper rate." While one can imagine a progressive income tax that would be less destructive than SOME imaginable flat taxes, there will ALWAYS remain one or more possible flat taxes that would be even less destructive than ANY given progressive income tax, and consistent with even more OVERALL fiscal progressivity once government spending is taken into account.)

Concerning progressivity, it is vital to remember that one cannot judge the progressivity of each specific tax in isolation. One MUST look at the total system of taxation, with all taxes taken together. And not only that, but with government spending taken into account as well.

In practice, there is only so much progressivity -- or equalization of after-tax incomes -- that can be attained, regardless of where and how we try to obtain it. And trying to obtain it **via the TAX code** inevitably creates powerful distortions that shrink the economy -- often substantially -- and reduce tax revenue commensurately. (Thus leaving the government with less money to spend on or transfer to the poor.) FAR better to tax income at a uniform rate, and then obtain one's progressivity via the SPENDING side of the ledger. Targeted expenditures for the benefit of specific groups, and payments to desired transfer recipients, will give you as much progressivity as can possibly be attained in practice, will do so at a reduced cost to the economy, and will also do so by lifting people at the bottom up instead of by pulling people at the top down. It may be less satisfying to those whose desire is solely to hurt "the rich," for the sake of hurting the rich, but it will do FAR more good for those at the bottom, and for society as a whole.

Trying to make the system even more progressive by making the **tax collection** part of it progressive as well inherently backfires, and makes the OVERALL system of taxation and spending -- taken together -- LESS progressive rather than more.

(Not that this is an easy thing to see. Most people are oblivious to it.)

Corporate Management's DUTY to Minimize Taxes Paid

Every corporation, and every director, has a fiduciary duty to the corporation's shareholders. That is why minimizing taxes in any way possible is not merely morally PERMISSIBLE, but morally OBLIGATORY. And LEGALLY obligatory as well -- subject to certain caveats.

One of these caveats has to do with something called the "Business Judgment Rule," a doctrine arising out of case law and applicable only within the United States.

http://en.wikipedia.org/wiki/Business_judgment_rule

In Delaware and any other US jurisdiction, a lawsuit against the directors of a corporation, or any of them, will fail so long as the directors' decisions can be defended as a valid exercise of the directors' good-faith business judgment. Thus, for example, if the directors of a company consider the matter and decide in their best business judgment that exploiting a particular tax loophole would not be in the corporation's best interest -- perhaps because of the negative publicity that might ensue, or out of fear of IRS or even Congressional retaliation, or because doing so might leave funds offshore and unavailable for the payment of dividends -- the courts will not second-guess them, and will not compel them to reimburse the company or its shareholders out of their own personal funds and assets for the excess taxes paid unnecessarily.

(Although Wikipedia does not mention this, the fact that personal financial liability of a director or directors would be the consequence of finding in favor of the suing shareholders is one reason why the bar is set so high. Individual directors could easily be bankrupted by one adverse decision.)

While I have not read the case to which Mole5000 alluded, it sounds like a textbook application of the Business Judgment Rule. What Mole5000 pointed out is true (I assume), but almost certainly does not have the meaning or significance he ascribed. It does NOT mean -- as Mole5000 suggested -- that directors do not have any legal obligation to maximize corporate profits and returns to shareholders in the first place, and therefore to minimize taxes of all kinds paid by the corporation. It only means that, in judging whether directors have satisfied their common-law duty to maximize net-of-tax financial returns to shareholders, the courts will always give the directors the benefit of the doubt.

(Naturally, if my guess is wrong and the Delaware case in question did NOT involve the Business Judgment Rule, then I welcome correction. And in case I do not come back on-line and see that correction on a timely basis, then I apologize here and now to Mole5000! But I will be VERY surprised if my guess is wrong, or more than a little off.)

.

P.S. Concerning this Companies Act of 2006 that several of you mentioned: Does it displace the common law of directorial fiduciary duty to shareholders?

Fiduciary duty has remained a matter of common law in the United States, under the corporation law of each of the 50 states (well, except for Louisiana), and I am surprised to learn that it may no longer be a matter of common law in the UK.

Obviously IBM and Apple are American companies, so the Companies Act does not apply to them, but I would enjoy learning more about this anyway.