The case for reform of tax code

The following editorial ran in the San Jose Mercury News on Thursday:

Tuesday’s congressional grilling of Apple CEO Tim Cook offers irrefutable proof that the U.S. tax code is, as stated so eloquently by House Ways and Means Chairman Dave Camp, “a mess.”

For starters, let’s admit that U.S. corporations don’t pay the highest corporate tax rate in the world. They dodge the highest corporate tax rate in the world, largely by stashing profits offshore.

And the iPhone and iPad maker is the leader of the pack in terms of both profits and offshore maneuvering. All told, Apple had piled up more than $102 billion in overseas cash as of the end of March.

It’s a system that both discourages companies from reinvesting profits in the United States and shortchanges federal tax coffers. The upshot is that, while firms such as Apple hire herds of lawyers to find ways to stash their cash, individual taxpayers assume a greater portion of the tax burden.

A fair and equitable overhaul of the entire tax system is needed. We wish that were imminent, but lawmakers can’t even agree on whether revisions should be revenue neutral or should bring in additional dollars to reduce the deficit.

Policymakers who designed the tax code never dreamed so many firms would be conducting so much of their business in the global marketplace. The code was written for another time.

A proposed one-time repatriation “tax holiday” didn’t work particularly well in 2004. Congress allowed corporations to bring back an estimated $300 billion from offshore stashes with a one-time 5.25 percent corporate tax rate instead of the standard 35 percent. U.S. firms, including Silicon Valley’s, promised to use the cash to reinvest in their companies and create jobs. Instead, about 90 percent went to shareholders and executive bonuses.

Cook suggests a top corporate tax rate in the “mid-20s” and a repatriation rate in the “single digits.” That has great appeal to Silicon Valley firms, but it’s a nonstarter in Congress unless it’s accompanied by elimination of some loopholes and tax breaks. President Barack Obama is moving in that direction, offering up a reduction in the corporate tax rate to 28 percent and closing dozens of loopholes.

The opposing views expressed by members of Congress at Tuesday’s hearing make it clear that a grand bargain on tax reform is unlikely. Unless Cook’s Cupertino wizards can concoct an app for that, the president’s proposal may be the best incremental step in the offing.

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