In October 24th issue of New York Magazine, Andre Tartar's Intelligencer column featured a black-background Darth-Vader-sinister entry, disdainfully called The Freeloading Playbook (see the page's image to the left). It presented four "tax-dodging" schemes employed by international corporations. I have quite a few problems with the piece, but will focus on the misleading interpretations that I believe to be the most damaging to the education of general public on such important subjects as political economy and corporate taxation.
First of all, as far as an average reader is concerned, the implications are that the corporations are engaged in unpunished tax-evasion practices. This is a gross distortion of truth. We can argue for years about the nature of trickery, but the fact is that the Internal Revenue Code had deliberately created these loopholes to accommodate the international expansion of the US business, and the companies simply utilize the opportunities the tax laws allow them. I assure you that there are other ways to reduce taxable income, including transfer-pricing of inter-company transactions (between the US parent and foreign subsidiary, or other way around).
Secondly, "freeloading" by definition means living off somebody's generosity. Way to further confuse clueless Zucootti-Park affectionadoes! Whose generosity we are talking about here? Those who get the biggest chunks of the revenue derived from corporate taxation? The military complex? Government-subsidized industries like automaking and agriculture? Chinese bankers (the interest on their loans to the US government must be paid)? Welfare recipients?
Also, I am absolutely appalled by the fact that the companies that reinvest their earnings into their international value chains are thrown onto the same page with actual schemers who creatively avoid taxation (still legitimately, though) through M&A transactions and intellectual property licensing. Notice how for "Double Irish," "Killer B," and "Deadly D" Mr. Tartar came up with singular examples – Google, IBM, and Eli Lilly respectively, while for earnings reinvestment he chummily states, "like, everyone."
Yes, everyone, including thousands of international small businesses who set up foreign subsidiaries as their distribution arms to sell US products abroad. (These structures are so common that I used one of them as a typical example in my book CFO Techniques– see the illustration below.) So, they don't repatriate all of their money because they incur operational expenses overseas in the normal course of business. That doesn't mean that they should be compared with the 500 super-rich companies.
M. Guzik, "CFO Techniques," Apress, 12/02/2011; Figure 5-1.
What exactly Mr. Tartar and others like him would like to propose? That establishing foreign subsidiaries for the sake of running more efficient businesses should be prohibited altogether by law, like it was in the Eastern bloc countries during the communist rule? Or that we allow double-taxation? Guess what? Business super-powers will survive anyway, but the small businesses exposed to such treatment would cease to exist.
And why nobody questions the incredible fact that in this supposed bastion of free-market economy we have practically the highest corporate taxes in the world – up to 38% federal, plus up to 12% state? So, in some localities there are companies who end up paying 50% of their income to the government. We have over 6 million companies with less than 100 employees in this country, and they are suffocated by these rates. Why don't we approach the taxation problem from that side?
Those who have at least rudimentary understanding of commercial principles and really care about our economy should be arguing for the protection of small businesses every chance they get, instead of throwing around meaningless and confused statements like the ones in the "Intelligencer."
The Frustrated CFO 