The idea that America's 35 percent corporate tax rate is stifling U.S. economic growth is almost an article of faith among some politicians.
The sound bites from Republican presidential debates to campaign stops are basically interchangeable: "We need to bring that corporate tax rate down."
But in fact, very few corporations pay taxes on 35 percent of their profits. With the help of complex international tax loopholes, some companies manage to pay almost no corporate tax at all.
'Double Irish, Dutch Sandwich'
It's not necessarily big oil or pharmaceutical companies that are cashing in on complex offshore tax loopholes. In fact, the corporation with one of the most advanced tax-shirking techniques may have helped you find this very article: Google.
"If Google paid taxes at the full 35 percent rate on all of its profits, it would lose almost a quarter of its total profits," Bloomberg reporter Jesse Drucker tells weekends on All Things Considered host Guy Raz.
Drucker says the company saved more than $3 billion from 2007-2009 through a winding system of offshore subsidiaries. Google's not the only company that does this, he says; many other tech giants like Microsoft and Apple have similar structures. But Google's offshore tax rate — 2.4 percent by Drucker's count — bests its peers in the technology sector in ways that a retail giant like Wal-Mart could never hope to.
In 2003, Drucker says, Google transferred all of its non-U.S. intellectual property rights to a subsidiary in Ireland.
"From that point forward," he says, "any profits coming from sales overseas would be contributed not to the U.S. parent — where they would be taxed at a rate of 35 percent — but to the Irish subsidiary."
The corporate tax rate in Ireland? 12.5 percent.
But Google didn't stop there, Drucker says. The company used a financial tool known in the corporate tax world as the "double Irish."
"The Irish subsidiary pays royalties to a second Irish subsidiary," Drucker says, this one that declares its tax residency in Bermuda, where there's no corporate income tax.
Google faced another problem it had to work around. The company would have to pay taxes to move money directly from Ireland to Bermuda, Drucker says, so it used another tool known as the "Dutch sandwich."
"So the payments go from the Irish sub to the Dutch sub to the Bermuda-resident Irish sub," Drucker says.
"The combination of these strategies has helped Google cut its effective tax rate overseas to the low-single-digit rate," he says.
Bermuda Or Bust
Google, like most corporations, will be the first to tell you that this is all completely legal under U.S. tax law.
"We have an obligation to our shareholders to set up a tax-efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate," a spokesperson told NPR.
To some politicians and economists, that sounds like a good reason to lower the U.S. corporate tax rate and draw Google's profits back home.
But draw them from where?
"We know that the corporate income tax rate in a number of countries overseas — even in our competitors, in the G-7 countries — is in the mid- to high-20 percent range," Drucker says.
"U.S. companies are not shifting income into those countries. They are not shifting income into the U.K., France and Italy. They are shifting income into Bermuda and the Cayman Islands," he says, "jurisdictions where there is no corporate income tax at all."
"If that's the case, it seems to me that it raises questions about whether cutting the U.S. corporate income tax rate would do anything to change any of this behavior," Drucker says.
Taxes On Holiday
All of Google's crafty accounting applies only to profits it collects overseas.
Consumer advocate Ralph Nader says the situation in the U.S. isn't much better.
He cites a recent report by the liberal Citizens for Tax Justice, which lists 12 corporations that — thanks to various loopholes, subsidies and other advantages written into the tax code — paid zero federal income taxes over the last three years.
"This is a seismic change in what might be called any semblance of U.S. corporate patriotism," Nader says.
So what would a fair corporate tax rate look like?
"I think we need to get back to where the OECD countries are, in the low- to mid-20s," says economist Stephen Slivinski of the conservative Goldwater Institute, referring to the international Organization for Economic Cooperation and Development.
If that happens, Slivinski says, "you could probably see some kind of capital coming back into the U.S."
Drucker says that even under a proposed corporate tax holiday that would allow major U.S. corporations to bring profits home at a low rate of around 5 percent — marketed by the likes of Cisco and Pfizer as a "second stimulus" — Bermuda and the Cayman Islands would still offer lower rates.
A similar tax holiday in 2005 wasn't very productive at all, he says.
"All of the cash brought back from overseas was used to buy back stock and give companies a boost in their stock prices," Drucker says. "It wasn't used to hire people and build factories."
GUY RAZ, host: From NPR News, this is WEEKENDS on ALL THINGS CONSIDERED. I'm Guy Raz.
Earlier this summer, here in Washington, a few top CEOs came to testify at a hearing of the Senate Finance Committee.
UNIDENTIFIED MAN: Gentlemen, you probably know the rules...
RAZ: These were the heads of multibillion dollar companies: Thomas Falk from Kimberly-Clark - they make everything from Kleenex to Huggies - Larry Merlo, the CEO of CVS was there, and so was Michael Duke.
UNIDENTIFIED MAN: The present CEO of Wal-Mart stores, the world's largest retailer, employer of about 2.1 million people.
RAZ: And all these CEOs came with one message: Corporate taxes are too high.
MICHAEL DUKE: My advice is straightforward.
RAZ: Wal-Mart CEO Mike Duke.
DUKE: Lower the corporate rate as much as you can and move to a territorial system.
RAZ: Our cover story today, corporate taxes. You hear it all the time, not just from CEOs, but politicians.
MICHELE BACHMANN: United States has the second highest corporate tax rate in the world.
MITT ROMNEY: Our taxes are higher than any other nation besides Japan.
RICK SANTORUM: We cut that corporate rate to zero.
ROMNEY: We've got to bring our tax rate down.
BACHMANN: We got to bring that tax rate down.
ROMNEY: I will do that on day one.
(SOUNDBITE OF APPLAUSE)
RAZ: That was Mitt Romney speaking in Nevada this week, and earlier Michele Bachmann, Rick Santorum and Rick Perry, all of course vying for the Republican presidential nomination. And then, just the other day, in a speech to Congress, President Obama said basically the same thing.
President BARACK OBAMA: By eliminating pages of loopholes and deductions, we can lower one of the highest corporate tax rates in the world.
RAZ: And on paper, it's true. The corporate tax rate here in America is 35 percent, one of the highest rates in the industrialized world. And a few companies like Wal-Mart do actually pay something close to that. But for a variety of reasons, many, many others pay a lot less. Take for example a company now valued as America's sixth richest.
JESSE DRUCKER: If Google paid taxes at the full 35 percent rate on all of its profits, it would lose almost a quarter of its total profits.
RAZ: That's Bloomberg investigative reporter Jesse Drucker. And you heard him correctly. If Google paid the full U.S. corporate tax rate, it would lose about a quarter of its earnings.
DRUCKER: And so it really gives you a sense of the degree to which the tax planning and tax departments in these companies are crucial to the bottom line of some of these companies.
RAZ: Like G.E.'s accounting department, which employs dozens of former officials from the Treasury Department and the IRS, Google's tax department is also really good at figuring out ways to save on taxes. So good, that instead of paying a 35 percent corporate tax rate, Google pays just 2.4 percent on profits it moves offshore. And it's all above board, all perfectly legal.
So how does it work? Well, with a plan set in motion back in 2003 when Google transferred all of its non-U.S. intellectual property rights to a company branch in Ireland.
DRUCKER: In other words, from that point forward, any profits coming from sales overseas would be attributed not to the U.S. parent, where they would get tax at a rate of 35 percent, but they would get attributed to the Irish subsidiary. In Ireland, the corporate income tax rate is 12.5 percent.
RAZ: So from 35 percent to 12.5 percent. That's pretty good, right?
DRUCKER: But Google didn't really stop there. In other words, they weren't satisfied to just have their profits overseas tax at a rate of 12.5 percent.
RAZ: So the company used a technique known in a world of corporate accounting as the double Irish. The Google branch in Ireland...
DRUCKER: Pays royalties to a second Irish subsidiary, this one that declares its tax residence in Bermuda. This is why it's called the double Irish. You have one Irish sub making payments to a second Irish sub and the second one is headquartered in a place like Bermuda where there's no corporate income tax.
RAZ: No corporate income tax at all. But there was one more hurdle to leap. To move its money to Bermuda, Google would have to pay Irish taxes to transfer money out of Ireland.
DRUCKER: So they first have to go to a Dutch subsidiary in between.
RAZ: That technique has a name, too, the Dutch sandwich.
DRUCKER: This is where the Dutch sandwich nickname comes from. So the payments go from the Irish sub to the Dutch sub to the Bermuda-resident Irish sub. And the combination of these strategies has helped Google cut its effective tax rate overseas to the low single digit rates. And this is the combination of the two strategies, the double Irish and the Dutch sandwich.
RAZ: Could you call it a (unintelligible)?
(SOUNDBITE OF LAUGHTER)
(SOUNDBITE OF MUSIC)
RAZ: It's enough to make your head spin. But for Google, all that crafty accounting added up to $3.1 billion over three years, more than half of the entire GDP of Bermuda, where that money is being protected. And Jesse Drucker says a lot of other American companies do the same thing, specifically tech companies.
So why do these companies, like Google and Apple and Microsoft and Cisco, pay such low corporate income taxes, but then a company like Wal-Mart actually pay close to 35 percent of the rate? I mean, it doesn't seem fair.
DRUCKER: Yeah. I mean, well, Wal-Mart has used various strategies at the state level that have actually been challenged in a number of states. But, yeah - I mean, Wal-Mart has a harder time with it because, you know, it's a store selling things. It's much harder to say that the profits are the result of intellectual property that resides with an Irish subsidiary.
RAZ: But you're saying even if we were to reduce the corporate tax rate in this country to 20 percent, it might not necessarily change anything.
DRUCKER: Well, obviously, no one can predict the future. But here's what we know. We know that the corporate income tax rate in a number of countries overseas, even in our competitors, you know, in G7 countries is in the mid- to high-20 percent range. U.S. companies are not shifting income into those countries. They are not shifting income into the U.K. and France and Italy. They are shifting income into Bermuda and the Cayman Islands where there is no corporate income tax at all.
And if that's the case, it seems to me that it raises questions about whether cutting the U.S. corporate income tax rate would do anything to change any of this behavior.
RAZ: Now, keep in mind, everything Jesse Drucker has been talking about only applies to the profits companies shift overseas. But when it comes to paying corporate taxes in the U.S., well, consumer advocate Ralph Nader says the situation isn't much better, in large part because of all the loopholes and tax credits.
RALPH NADER: The latest report by Citizens for Tax Justice listed 12 major corporations - we all know them: General Electric, American Electric Power, DuPont, Verizon, Boeing, Wells Fargo, Honeywell International, IBM, Yahoo, United Technologies, Exxon Mobil and FedEx. In the last three years, these corporations made a total of $171 billion in U.S. profits, paid zero federal income tax and got $2.5 billion back. That's the story.
RAZ: Now, you've been talking about this for a long time, and you mentioned that compared to the 1950s, I believe corporate taxes accounted for about 30 percent of government revenue. Today, it's about nine percent, maybe 8.5 percent, not entirely clear, but...
RAZ: ...clearly much lower today than it was in the '50s, for example. Was there a time when corporations, you know, sort of felt like it was their duty to pay higher taxes?
NADER: Well, I think they were more rooted in the community. Now, they're global corporations, and they had a reduced allegiance to our country and to our communities other than to control them. And this is a seismic change in what might be called any semblance of U.S. corporate patriotism.
RAZ: You could argue, Ralph Nader, that corporations provide products and services that improve the lives of, you know, lots of people. And then I can go to Wal-Mart and buy affordable groceries, for example. You can get an affordable dishwasher or appliance that's made by General Electric. We all have more access to information because of Google. All of these companies pay different corporate taxes. But I'm wondering if in some cases the good outweighs the bad.
NADER: I don't think it does. I think increasingly, the necessities of life are being denied the American people. After all, Harvard researchers say 45,000 Americans die every year because they can't afford health insurance to get diagnosed and treated. Necessities of adequate shelter are not adequate for the American people.
And that's why when you go all over the country, what you see is the disrepair of America as well as incredible poverty. We're getting short ended on the necessities. And that's where it really counts.
RAZ: Consumer advocate Ralph Nader. So what should the corporate tax rate be? We put that question to economist Steve Slivinski of the conservative Goldwater Institute.
STEPHEN SLIVINSKI: Well, I mean, I think we need to get back to where the OECD countries are in kind of in the low- to mid-20s. And again, we need to be looking at how we're broadening the base in that respect. The goal would be to try to make sure that, in a sense, you're not taxing saving and investing as heavily as you're taxing something like consumption for instance.
RAZ: All right, Steve, we hear people talk about broadening the base. Isn't that code for asking poor people to pay more?
SLIVINSKI: Well, it depends on what you're talking about. I don't necessarily think it's a code. I think it is a realization that you're in some kind of tax shifting. I think what I'm talking about in terms of the corporate income tax, I'm thinking of it in terms of how should we be treating the kind of good behavior we want to encourage. The idea that if you're working more and you're investing more, you shouldn't be penalized with a higher rate just because you've done more of that. And that's sort of what the current system does tend to encourage.
RAZ: If the federal government were to lower corporate tax rates - let's say to what you're talking about, 20 percent - do you think ultimately it would actually generate more revenue?
SLIVINSKI: Well, that depends on how much tax sheltering is going on right now. But I do think that you could probably see some kind of capital coming back into the U.S. And I think you would also see some kind of general increase in economic growth, which could also have beneficial effect in tax revenues on other non-corporate tax revenue sources.
RAZ: Now, remember, earlier, reporter Jesse Drucker pointed out that American corporations aren't shifting money to places where the corporate tax rate is 10 percent lower than it is here in the U.S. They're moving it to places where the rate is zero. So, why don't we drop the rate to zero? Well, Republican presidential front-runner Rick Perry is suggesting that in some cases, we should.
Governor RICK PERRY: Corporate profits that are offshore.
RAZ: About a month ago at a small gathering in New Hampshire, he called for a tax holiday, a deal where American corporations could bring back the profits they keep in tax shelters overseas and pay something much, much lower in tax.
PERRY: Say, something like, if it's clearly going for job creation, like zero.
RAZ: Zero. Now, Jesse Drucker says this is not a new idea. Back in 2005, a deal was indeed struck, a tax holiday, where the largest American corporations were allowed to bring profits back to the U.S. and pay just 5 percent tax on that money.
DRUCKER: All of the independent research on that holiday shows the majority of the cash that was brought back from overseas was used to buyback stock and give companies a boost in their stock price. It wasn't used to hire people. It wasn't used to build new factories. And the notion that things are happening in the economy and there are problems in the economy because U.S. companies don't have enough cash is, on its face, wrong.
I mean, the most recent data from the Federal Reserve shows that U.S. companies are sitting on a record pile of cash, nearly $2 trillion. So it's unclear why getting a tax break on earnings that have been moved overseas would do something to give the economy a boost. Transcript provided by NPR, Copyright NPR.