How To Tax Multinationals Hiding Behind The Tree? Use The Mighty U.S. Consumer

Apr 21 2014, 10:34am CDT | by

No, not all tax policy ideas come out of Washington, D.C.  Bill (William H.) Parks, a retired finance professor and founder of NRS, Inc., an Idaho-based paddle-sports accessories maker with $30 million plus in annual sales, has been promoting an idea for taxing the profits of multinational corporations that’s borrowed from the states. Simply put, the IRS would determine the share of a company’s earnings taxable in the U.S. based solely on the share of its sales made to U.S. consumers, the biggest spenders in the world. If you buy a new iPhone, you’d raise Apple's U.S. tax bill.  Buy a Galaxy S5 and Samsung would pay the IRS. No more Senate hearings on the aggressive techniques used by Apple, HP or Microsoft to shift profits abroad. No more fights about the location of intellectual property. In the following guest column, the 79-year-old Parks explains his idea for reforming the federal corporate income tax.

Tax Those Fellows Behind The Tree

By Bill Parks

Don’t tax you, don’t tax me
Tax that fellow behind the tree!
—/>/>
Senator Russell B. Long

It’s time to tax “the fellows behind the tree,” those multinational corporations hiding in plain sight from the IRS by claiming to domicile their operations in foreign low-tax jurisdictions. Recent revelations have exposed the pitiful amount these companies pay on their substantial profits. But they are not to blame if we offer them a legal way to avoid taxes. Who among us wouldn’t do the same thing if given the chance?

So how can we get them to pay their fair share? The solution, like tax-avoiding multinationals, may be hiding in plain sight. Over 100 years ago, Wisconsin pioneered a way of assessing taxes on corporate profits known as formulary apportionment. The Wisconsin model examined a combination of assets, payroll and sales within the state to determine a corporation’s state income tax liability. As other states followed Wisconsin’s lead in adopting formulary apportionment, some opted not to tax payroll and assets, wisely not wanting to discourage either. (A Federation of Tax Administrators list of approaches used by each state is here. )

Sales-based formulary apportionment takes for granted the fact that, while companies can move and manipulate payroll and assets, and even exist without them, no company can survive without sales. As the late Wal-Mart founder Sam Walton famously said: “There is only one boss: the customer.” By harnessing the power of the U.S. consumer market through single sales factor formulary apportionment, we can stop subsidizing the export of jobs and profits and stop discriminating against domestic companies in favor of the multinationals.

Single sales factor formulary apportionment is a territorial system, which means it taxes only domestic activities. In this way, it is simpler and more effective than a universal system, such as our current one, which attempts, and often fails, to tax the world-wide business activities of U.S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game; companies can easily move certain business operations and assets out of the U.S., but few, if any, would be willing to give up sales to the world’s most powerful consumer market.

By taxing only the proportion of companies’ overall profits that comes from U.S. sales, we could greatly simplify the tax code and drastically reduce opportunities for system-gaming. This would also level the playing field for smaller domestic firms that typically pay far higher rates today than their multinational competitors. And by taxing the sales of foreign firms that profit from the U.S. market in the same way as domestic firms, it would improve the global competitiveness of U.S. companies while broadening the tax base. This broader tax base would introduce new possibilities for economic stimulus such as reducing the overall corporate tax rate, paying down the debt and reducing deficits, or investing in infrastructure and education.

Of course, there are aspects of single sales factor formulary apportionment that will concern both liberals and conservatives, but these concerns are easily allayed. Liberals worry that a territorial system would drive more corporations to avoid taxes by moving operations abroad, but the single sales factor eliminates that danger by leveraging the power of the U.S. consumer market, which virtually no company would willingly forsake. Furthermore, because it would broaden the base and raise revenues, this system could make more money available for supporting liberal priorities.

Some conservatives want to unfetter U.S. companies by doing away with corporate taxes altogether. But if reducing deficits and paying down the debt are serious priorities, shutting down a key revenue stream is unrealistic. Single sales formulary apportionment can raise revenues for debt and deficit reduction while making U.S. companies more globally competitive.

Today, U.S. companies pay taxes on their U.S. and foreign activities (not really, those taxes on foreign activities are deferred until repatriated, i.e. never), while many foreign corporations pay no U.S. taxes. The single sales factor would eliminate this disadvantage for U.S.-based companies by taxing the U.S. profits of American and foreign firms at the same rate while leaving U.S. companies’ profits abroad untouched. In addition, a broader tax base could make it possible to lower the overall rate, reducing the tax burden for many U.S. businesses.

Fairly implemented, a territorial system based on single sales factor formulary apportionment would benefit U.S businesses and the economy. It would improve American competitiveness in the global marketplace while raising much-needed revenue for economic improvement. Its simplicity and transparency would not only help prevent system-gaming by which many companies avoid paying their share today, it would also make compliance far less onerous for U.S. companies. And because it would tax only profits on sales, it would do all of this without hindering new business growth.

Ultimately, “the fellow behind the tree” may find himself compelled to come out of hiding.

Bill (William H.) Parks founded Northwest River Supplies with a $2,000 investment in 1972 to see if he could apply what he was teaching as a professor of business and finance. NRS, Inc., in which Parks retains a controlling stake, now has annual sales in excess of $30 million.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Childless couples too enjoy family meals
New York, Sep 19 (IANS) Couples without kids in the house are just as likely as adults living with young children or adolescents to eat family meals at home on most days of the week, says a US-based study.
 
 
Now, explore Egyptian pyramids from home
London, Sep 19 (IANS) If you are yet to experience the wonders of the ancient world still surviving in Egypt, you can now turn into a virtual visitor -- thanks to Google Street View -- and explore the pyramids from the comforts of your home.
 
 
Want good raise at work? Get a supportive wife
New York, Sep 19 (IANS) Do not just blame your boss or jealous colleagues for no promotion or salary hike at work - your spouse's personality is equally important to decide if your chosen career will make you richer or poorer.
 
 
People with larger pupil size bad decision makers
London, Sep 19 (IANS) People with larger pupil size tend to be inconsistent in their decisions, says a study.
 
 
 

Latest from the Network

Asian Games: Indian women's badminton team in quarterfinal
Incheon, Sep 20 (IANS) Indian badminton women's team Saturday entered the quarterfinal of the Asian Games after thrashing Macau 3-0 in their pre-quarterfinal tie at the Gyeyang Gymnasium here. For India, singles stars...
Read more on Sport Balla
 
'Fashion Police' will continue without Joan Rivers
'Fashion Police' is set to continue following the death of Joan Rivers. A new season of popular style series, which the late comedienne hosted for four years until her death earlier this month and is produced by her...
Read more on Celebrity Balla
 
Tim McGraw intimidates daughters' boyfriends
Tim McGraw enjoys intimating his daughters' boyfriends. The 47-year-old country singer - who has three children, Gracie, 17, Maggie, 15, and Audrey, 12, with wife Faith Hill - admits he isn't entirely comfortable with...
Read more on Celebrity Balla
 
Dylan Penn wants to be a director
London, Sep 20 (IANS) Model Dylan Penn, who is making her acting debut with "Condemned", aspires to be a screenwriter and director in future. In an interview to Vanity Fair magazine, Penn, daughter of Sean Penn and...
Read more on Celebrity Balla
 
Shweta shoots first medal for India, wins bronze
Incheon, Sep 20 (IANS) Shweta Chaudhry shot the first medal for India in the 2014 Asian Games after she won the bronze in the women's 10m air pistol at the Ongnyeon International Shooting Range here Saturday. Shweta,...
Read more on Sport Balla
 
China clinch first gold medal at Incheon Asian Games
Incheon, Sep 20 (IANS) Chinese markswomen Guo Wenjun, Zhang Mengyuan and Zhou Qingyuan won the women's 10m air pistol team event Saturday morning, the first gold medal at Asian Games. It was the fourth consecutive...
Read more on Sport Balla
 
Paltrow acquires new culinary skills
Los Angeles, Sep 20 (IANS) Actress Gwyneth Paltrow has added baking to her culinary skills by taking private lessons from top chef Zoe Loeb. The 41-year-old jumped at the chance to work with her long time friend Josh...
Read more on Celebrity Balla
 
Lille to stage 2014 Davis Cup Final
London, Sep 19 (IANS) The Stade Pierre-Mauroy in the French city of Lille will stage the Davis Cup World Group Final between France and Switzerland Nov 21-23. The tie will be played indoors under a retractable roof...
Read more on Sport Balla
 
Scottish First Minister resigns after defeat in referendum (Roundup)
Edinburgh, Sep 19 (IANS) Scottish First Minister Alex Salmond Friday announced his resignation after his Yes campaign's defeat in the independence referendum, Xinhua reported. Addressing a press conference broadcast...
Read more on Politics Balla
 
UN Security Council calls for international support against IS
United Nations, Sep 20 (IANS) The UN Security Council Friday urged the international community to "further strengthen and expand support" for Iraqi government in fighting Islamic State (IS) in Iraq and Syria. In a...
Read more on Politics Balla