How taxpayers are subsidizing Google--and its stock price

I've written multiple times (most recently here) about my view that government policy--both leading up to and in response to the global recession--has disproportionately benefited the rich over the poor, and more importantly the large business over the small business. As I wrote previously, "Sometimes, as in the case of TARP, this favoritism is clear and intentional. Other times, in the case of Fed-induced dollar debasement, it is more insidious via increasing consumer price inflation."

I also mentioned in this piece that our current tax policy is horribly misguided, and that it is largely to blame for our burgeoning deficit and debt (spending is obviously another huge issue that I've discussed, but there are two sides to any budget deficit). I wrote then that "it is completely ludicrous to spend time chasing after small businesses in search of $17 billion [in tax revenues] that might not exist, when the majority of U.S. companies--many of them large--currently pay no income tax." In that case, I was referring to the so-called 1099 provision in our health care bill, and the disproportionately onerous impact that it would have on small businesses.

Now, Bloomberg has brought to light just how significant the impacts of our bizarre tax policy can be. Jesse Drucker writes,

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.

Let's forget for a moment that the techniques Google is using (the "Double Irish"? The "Dutch Sandwich"? Really??) sound a bit like euphemisms for obscure sexual perversions. It is beyond ridiculous that a company like Google should be able to legally avoid taxes for so many years, while individual taxpayers pick up the slack. I mostly like Google as a company, and I don't think they're violating their corporate credo and being evil here--they're just being rational.

But when Google generates massive piles of cash--all of it essentially untaxed--we all pay the difference between their nominal tax rate and their effective tax rate. Furthermore, Google cannot repatriate that cash (and reinvest in our economy) without enduring a significant tax hit. So their only choice is to keep that cash abroad, and use it there instead of here--that means continued foreign hiring, and no uptick in domestic employment. No amount of currency market posturing against China will change that structural flaw.

 

[Click here for interactive graphic]

If we want to close our budget gap and stimulate our economy, finding a creative and rational way to fix this problem is an absolutely essential first step. But our politicians would rather waste their time arguing about Bush tax cuts and individual tax rates, continuing to distract from the main point. The impact of allowing the Bush tax cuts to expire is estimated at $700 billion over 10 years; Google alone avoided $1 billion in tax just last year.

Extrapolate Google's $1 billion to include all of the multinational corporations in the S&P 500 who similarly avoid taxes, and you've got a number that clearly dwarfs the impact of any individual tax policy changes. We may worry that increasing the effective tax on these corporations will change their incentives to hire and invest, but where's the evidence that our current tax policy is actually incentivizing them to invest and to hire? Certainly not in our 17.1% effective unemployment rate.

Bloomberg estimates that the total impact of Google's unpaid taxes has boosted its stock price by nearly $100 per share--about a 20% increase over what it would be absent preferential tax treatment. That increase is subsidized by U.S. taxpayers, and also disproportionately benefits the rich who own GOOG stock over the poor who don't. We need to crack down on this, and we need to do it now.

[Bloomberg]