All Commentary
Monday, June 24, 2013

Helping Consumers by Avoiding Taxes

Apple, Google, and several other big businesses have recently come under fire for not paying their fair share of taxes. Their actions, however, have not broken any laws and benefit everyone, producer and consumer alike.

Recently, Apple CEO Tim Cook testified before Congress about his company's tax behavior. According to Congress, Apple is guilty of avoiding paying taxes by shifting its intellectual property and other transactions to various countries around the world. While Congress has acknowledged that nothing that Apple or Google is doing is explicitly illegal, these types of hearings send a clear message: This behavior is wrong.

It’s easy to see why government officials see it this way. “Taxes are what we pay for a civilized society,” according to a quote, attributed to Oliver Wendell Holmes, that currently adorns the IRS building in Washington, D.C. If that’s the guiding principle, then even legal routes around taxes amount to immoral behavior.

The economic effect of a tax is clear. When a tax is placed on a product, producers end up receiving less money per unit sold while consumers end up paying more money per unit purchased. When prices fall for producers, they reduce their production. When prices rise for consumers, they reduce their consumption. This means taxes amount to little more than a reduction in trade. Reducing taxation, therefore, would have the opposite effect: Lowering the price felt by consumers while simultaneously raising the price that producers receive would increase the amount of trade that happens.

Funneling profits offshore to reduce a tax burden might be a behavior that governments want to reduce. There are two ways to accomplish this goal. The first is to try to close tax loopholes by making it illegal to move profits offshore. This strategy effectively raises the cost of finding loopholes by making the loopholes harder to find. It also has the side effect of lengthening the federal tax code, which currently runs to just over 70,000 pages. In order to close loopholes into the future, politicians would have to anticipate all future tax schemes and ban them. This is problematic because the politicians themselves have little to no incentive to discover the loopholes in the first place, meaning they will always be playing catch-up to the businesspeople who do.

The second is to reduce the payoff of discovering loopholes by lowering the taxes charged to companies. Doing so lessens the reward for finding and exploiting loopholes, which means that companies will find it less worthwhile to do so. Ironically, this second approach may end up increasing tax revenues, as more transactions would be reported as taking place in the United States. If the percentage change in the number of transactions is bigger than the percentage change in the tax rate, tax revenue will increase.

The case for lowering taxes has never been stronger. Indeed, it has never been weak to begin with. Doing so benefits consumers and producers alike as it lowers the price to consumers and raises the price to producers. I’ll leave it to readers to decide whether increasing revenues to government is a good thing.

  • David Hebert is an Assistant Professor of Economics at Ferris State University. His interests include public finance and property rights.