Is It Time for Serious Corporate Tax Reform?

US CapitolOn Tuesday, May 21, The US Senate’s Permanent Subcommittee for Investigations will be holding a hearing regarding Offshore Profits. The specific target of that hearing will be Apple, Inc.

Tim Cook, Apple’s CEO will testify at the hearing, along with Apple’s CFO and Head of Tax. Mr. Cook told the Washington Post that he intends to share with the Senators his thoughts regarding “drastic simplification” of the US tax code.  He said that he believes such a change would help make US corporations more competitive internationally and would result in more jobs in the US.

Apple is a target for the PSI hearings (which grilled representatives of HP and Microsoft last September), because it currently holds billions of dollars outside the US rather than pay US taxes on those funds. The money was generated by profits outside the US, and US tax rules say that Apple does not need to pay US tax on those profits as long as it expects to reinvest that cash in its international operations.

For example, Apple recently borrowed $17 billion through an issuance of corporate bonds to fund a stock repurchase and increase in quarterly dividend payment rather than repatriate a portion of those international funds – thereby avoiding paying about $9 billion in US tax (according to published reports).

I find the specific situation with respect to Apple interesting, but I believe that the larger question of US corporate tax policy to be much more important for the economy. I hope that Mr. Cook’s ideas can start a serious discussion about the policy goals that the US has regarding its corporate tax – so the current labyrinth of laws and rules can be updated and simplified. The tax code should be streamlined such that every rule support two overarching goals: strengthening the general economy and creating good jobs.

As much as possible, corporate resources should be put to work innovating: creating, manufacturing and selling valuable goods and services rather than being allocated to filling out forms and meeting arcane requirements.

As a professional venture capital investor, I can state first-hand that tax rules can make the difference between a fundable opportunity and one that is interesting but not fundable because its returns do not meet our requirements.

I have seen some calls for a total elimination of the corporate tax code – only tax profits when they are paid to stockholders as dividends. I see an elegance in the simplicity of that position, but I hav not researched enough of the consequences of such a drastic change to decide whether or not I support that idea. What I would like very much to see is an open and robust debate about what would be a better system than the system that we have.

We don’t need to debate whether the current system is broken. Everyone, all along the political spectrum, agrees that the current system is broken. Lets get to taking about how to fix it, or even better, to how to replace it.


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3 responses to “Is It Time for Serious Corporate Tax Reform?”

  1. Anonymous says :

    After hearing about the recent IRS targetings, I’m no longer interested in solutions which do not include the elimination of the IRS. This, of course, will probably get me audited.

    • Graham Burnette says :

      The recent news about targeting of groups based on their political positions does severely undermine trust in the IRS – and keep in mind that the US tax system is a trust-based system. We self-report our income and pay our taxes.

      If we tried to have an external enforcement system, it would collapse under its own weight.

      This is why everyone, on the left and on the right, have expressed outrage.

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