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Why Your Taxes Don't Matter and Apple's Do

Business executives make decisions based on taxes. And when taxes are high, they take their business elsewhere.
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Wait, what? Yes, you heard right. Yes, my individual taxes are high. And I'd love a tax cut. But cutting them won't grow the economy. At least that's what Howard Gleckman says. And I think he's right. There's a much, much better way to do this.

Gleckman, a Resident Fellow at the Urban Institute and editor of the wonky TaxVox uses the recent example of the state of Kansas to prove how cuts in individual tax rates do not stimulate the economy. He writes: "The tax cuts in Kansas have been breathtaking. In 2012, at Gov. [Sam] Brownback's urging, the legislature cut individual tax rates by 25 percent and repealed the tax on sole proprietorships and other 'pass-through' businesses. It also increased the standard deduction (though it eliminated some individual credits as well). In 2013, the legislature cut taxes again. It passed a measure to gradually lower rates even more over five years. By 2018, the top rate, which was 6.45 percent in 2012, will fall to 3.9 percent."

You would think with all of these cuts, the state's economy would have improved. But the numbers are different. Gleckman reports that, "From June 2013 to June 2014, all Kansas tax revenue plunged by 11 percent. Individual income taxes fell from $2.9 billion to $2.2 billion and all income tax collections plummeted from $3.3 billion to $2.6 billion, a drop of more than 20 percent. And that brings us to the bottom line. Since the first round of tax cuts, job growth in Kansas has lagged the U.S. economy. So have personal incomes. While more small businesses were formed, many of them were merely individuals taking advantage of the newly tax-free status of those firms by redefining themselves as businesses."

Again, he's right. You can't argue with the numbers. Cutting taxes on individuals didn't stimulate the economy. And remember the Bush tax "rebate" of 2008? That was a flop too. Why? Cutting individual taxes may be good politics. But bad economics. Forget the individual. Instead, cut Apple's taxes.

Tax cuts are supposed to generate spending and create jobs. Some believe that putting a few extra dollars in people's pockets will do that. But people don't create jobs. Businesses create jobs. They invest in equipment. They hire contractors. They build factories. And it's only when taxes are reduced for businesses will an economy see the benefits. Tax rates drive their decisions. Smart companies make decisions based on cost. And taxes are an enormous cost. So when corporate taxes are high, companies will respond to maximize their profits. They'll take their business elsewhere. And the economy will suffer.

Want proof?

Just this week the New York Times reported on a new trend happening in the U.S. pharmaceutical industry called "inversion": "By buying a smaller overseas competitor and reincorporating abroad, health care companies are extricating themselves from the American tax regimen. Their new international domiciles also give companies easier access to overseas cash and make additional inversions more attractive." Using inversion, these companies are buying overseas companies, infusing cash in the local economies and moving operations abroad. Why? To avoid higher U.S. taxes.

Meanwhile Bloomberg reported that "The largest U.S.-based companies added $206 billion to their stockpiles of offshore profits last year, parking earnings in low-tax countries until Congress gives them a reason not to. Three U.S.-based companies--Microsoft Corp. , Apple Inc. and International Business Machines Corp.--added $37.5 billion, or 18.2 percent of the total increase." Taxes are driving their management decisions. Can you blame them?

And as written recently in Forbes: "...an investigation commissioned by (Senator Carl) Levin detailed how Caterpillar had ingeniously avoided paying $2.4 billion in taxes since 1999 by negotiating with Switzerland to create a tax shelter for its international parts business. By moving its parts business away from the U.S., Caterpillar managed to shift 85% of its international parts revenue to Geneva, thus avoiding U.S. taxes on $8 billion in profits." As a business owner I say to Caterpillar: respect. You guys are smart.

I can provide more examples, but you get the picture. Taxes are an important part of any business executive's decisions.

You run a business. You know how high taxes affect your choicess, limit your investments, and reign in your spending. This is not just an accounting game. These are billions of dollars taken away from our economy. And for good reason. Companies like IBM and Apple are run by smart people who, like you, want to maximize their profits. And they're being forced to spend their money and hire people elsewhere. Because in the U.S., it's just too expensive. They are running away from higher U.S. taxes to lower tax environments.

So yes, Mr. Gleckman is right: Tax cuts on individuals don't really stimulate the economy. The problem is we're targeting the wrong audience. Forget the individuals. If you really want to grow our economy, cut Apple's taxes.

Last updated: Jul 16, 2014

GENE MARKS | Columnist | Owner, Marks Group

Gene Marks is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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