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.