S&P Says Microsoft More Creditworthy than US Government

Date: 12 Aug 2011 | posted in: From the Desk of David Morris, The Public Good | 1 Facebooktwitterredditmail

Two days after Standard and Poor’s downgraded US government bonds, David Llewellyn-Smith, writing in The Sydney Morning Herald noted, “We now face the ludicrous circumstance in which the United States government holds … a lower (credit) rating than Microsoft, despite issuing its own currency (the world’s reserve), being able to raise taxes when it chooses, owning a printing press and possessing no fewer than 11 nuclear-powered aircraft carriers (ten of which are Nimitz class).”

Actually S&P considers not only Microsoft but also three other companies more creditworthy than the country in which they are located:  Johnson & Johnson, Exxon-Mobil, and ADP. A handful of other companies probably would be considered AAA but don’t carry a rating because they carry no debt. With $76 billion in cash on hand, Apple is probably the best example.

Credit rating firms normally adopt what is known as a “sovereign ceiling”: no company can borrow on better terms than its own country.  It is rare for a rating agency to downgrade a country’s credit rating without comparably downgrading private companies.  But two days after downgrading US bonds, S&P reaffirmed the AAA ratings of these four companies’ bonds. “(G)iven the global and diverse business lines and significant financial strength” of the companies, it explained, “we expect the borrower to continue to fulfill its financial obligations, even in a sovereign default scenario.”

There is much to chew on here.  Recall that Standard and Poor’s justified its action on US credit in part “because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”  But the driving force behind the Republican Party’s refusal to raise corporate or income taxes is giant global corporations, some of which now have a credit rating better than that of their government.

They’ve achieved this lofty status in part by evading federal income taxes.  Tax avoidance has made their private balance sheets much healthier while making their country’s public balance sheets much sicker.

The current corporate income tax rate is 35 percent.  Exxon paid only 17.2 percent in 2010, less than half the statutory rate.  In 2009 it paid no federal income taxes at all. In 2011 Microsoft paid 17.5 percent.

These low tax rates are a result of sophisticated strategies for tax avoidance.  Exxon has 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that shelter the cash flow from operations in Angola, Azerbaijan and Abu Dhabi. Microsoft frankly explains a similar strategy to its stockholders,

Our effective tax rate was lower than the U.S. federal statutory rate…primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which are subject to lower income tax rates.

These measures helped Microsoft avoid $14.2 billion in U.S. taxes.

Corporations seeking to avoid paying federal taxes depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries.  Google, a company with a cash hoard almost as large as Apple’s is one of the most aggressive practitioners.  Google’s transfer pricing strategy boosted its earnings by 26 percent last year. (See here for a good interactive graphic describing the elements of Google’s tax avoidance strategy.)  A calculation by Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida found that if the company paid taxes at the 35 percent rate, its share price might be reduced by about $100, or about 15 percent.

Google’s effective tax rate for the six months ending June 30, 2011 was 21.4 percent.

Such income shifting increases the federal deficit by as much as $60 billion a year, $600 billion over the ten years involved in the debt ceiling negotiations, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

In February, the Obama administration proposed measures to curb the practice of shifting profits offshore. Unsurprisingly, the proposal has languished in Congress.

Adding a large dose of insult to an already substantial injury, many of these most aggressive tax avoiders—Oracle, Google, Apple, Microsoft—wouldn’t exist if it were not for the largesse of the federal government.

The Internet traces it origins back to a Defense Department project in 1969.  Later, public money developed UNIX and most of the web’s basic protocols.  In the 1980s the National Science Foundation based its super computer networks on Internet protocols and NSFNET was born.  It would be the core of the Internet, until it was privatized in 1995.  Public money developed hypertext and Mosaic, the software that made the Internet easy to navigate, and launched the World Wide Web as we know it.

The mid-1990s research at Stanford University that helped lead to Google’s creation was funded by the U.S. National Science Foundation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research.

Probably the single most egregious example of tax avoidance occurs in one of the nation’s most profitable industries: pharmaceuticals.  In 2010 one of Standard and Poor’s four AAA rated companies, Johnson & Johnson had an effective corporate income tax rate of 21 percent.  While significantly below the statutory rate, it is actually far higher than the pitifully low 5.6 percent the pharmaceutical industry, of which it is a prominent member, pays.

Meanwhile, the government spends more than $30 billion a year on bio-medical research through the National Institutes of Health.  Drug companies are awarded patents even though their drug’s development was largely paid for by public money, allowing the companies to charge hundreds of dollars for medicine that would cost just a few dollars in a fully competitive market.

In his 1961 Inaugural Address President Kennedy memorably said, “Ask not what your country can do for you.  Ask for you can do for your country.”  The private companies have inverted that message.  They strive to minimize the amount they give to their country while maximizing the benefits they derive from it.

Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston insists, “A company’s obligation to its shareholders is to try to minimize its taxes…”  These huge corporations are admirably fulfilling their obligation to their shareholders.  But they are failing miserably in living up to their obligations to their country.

US corporations have persuaded themselves that they can starve the public sector—education, research, and infrastructure investment—and continue to generate high profits.  They have come to believe their fates are no longer inextricably tied up with the fate of their country’s economy. They’re sorely mistaken and we’re all suffering from the consequences of their delusion.




David Morris
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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.

David Morris
Follow David Morris:
David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.

  1. Elliot Hoffman
    | Reply

    Excellent piece, David. Not only are these and other corporations getting away “tax / country murder”, so are many of the individuals running these behemoths and other wealthy elite (see Warren Buffet’s NYT op-ed, Aug. 15, 2011).
    As I watched public TV’s “Nightly Business” last night (Aug. 15), I was horrified at comments made by Susie Garab. She commented that even if all of the nation’s millionaires (defined as making over $1mm in income last year – which, as you know is not even the definition of a “millionaire”), plus those 9,000 families making over $10mm last year, it would be a “drop in the bucket” in terms of additional income. She specifically stated that all combined, if we assumed a 2% tax increase on all these folks, we’d see $25 billion per year added to the tax roles ($250B over 10 years). Why wouldn’t we assume a near doubling from an average of 17% (cited by Buffet) to 35% (obviously should be considerably more in a true progressive tax system). That would likely raise an additional (roughly) $1 Trillion over 10 years)

    It is this kind of erroneous reporting that puts people to sleep. For example, if we only started with the top 50 private equity fund managers (average income 2008 was $1 billion – for one year), and raised their tax rate to that of us mortals (35%), that alone would add $250Billion over 10 years.

    So, if we started with three-four simple tax fairness changes, look what happens over 10 years (only my estimates):
    1. End Bush tax cuts on incomes over $200,000 – roughly $1 Trillion
    2. End “special” tax treatment for private equity managers and all others – $1 Trillion
    3. End tax havens for corporations – pay the full 35% – at least $1 Trillion
    4. Collect all taxes due – severe penalties for tax avoiders – $2 Trillion

    There’s approximately $5 Trillion over 10 years simply by making the current tax system work better and fairer.

    Then we can get into a serious conversation about transforming this incredibly corrupt system and Congress and end things like fossil fuel subsidies ($250 billion – per year – YES – that’s $250 Billion per year), and begin to build a nation that would truly be “the beacon on the hill.” Elliot Hoffman

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