A recent front-page story in the New York Times had this headline: "How Apple Sidesteps Billions in Taxes: Funneling Earnings to Low-Tax Regions." Using a variety of perfectly legal methods, including one involving overseas subsidiaries in low-tax countries called a "Double Irish with a Dutch Sandwich," Apple is able legally to reduce its worldwide tax bill by billions of dollars. Not surprisingly, the Times reports, "Today, that tactic is used by hundreds of other corporations—some of which directly imitated Apple's methods."
Expect the number of companies following Apple's lead to skyrocket in January of 2013, when "taxmageddon" arrives, as former Treasury Secretary John Snow calls it. That's when the 2003 tax law expires, and payroll taxes will go back up. President Obama wants to raise taxes on every taxpayer, increase the highest federal income tax rate by 20 percent, double the capital gains tax rate, triple the tax on dividends, and add a new tax on capital earnings. He's also proposing the Buffett Rule, which would raise the income tax rate on millionaires to no less than 30 percent. Add to that scheduled budget cuts in domestic spending and you've got what the Washington Post calls a "New Year's budget bomb." Fed Chairman Ben Bernanke says it's a "fiscal cliff." The great hope in Washington is that the lame-duck Congress will negotiate a new budget deal in time to avert disaster.
The president has done nothing to head us away from the cliff. He prefers to talk about raising taxes and "paying one's fair share." What he doesn't talk about is what will happen when those taxes are hiked. As we see in the case of companies like Apple, it's a rational economic decision to pay as few taxes as legally possible. As taxes go up, more companies will "sidestep" their tax bill offshore. It's also completely rational for one to change the behavior that incurs the taxes in the first place; that's the logic behind so-called sin taxes that try to dissuade people from smoking, for example. When the government taxes cigarettes at a high rate, people tend to stop smoking. When the government taxes investing, taking risks, and making profits, individuals and businesses tend to stop doing that, too.
Take a look at what happens in high- and low-tax states. For the last 40 years, we know that the states without income taxes had faster growth in economic output every decade than the states with the highest income taxes. "In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs," wrote economists Arthur Laffer and Stephen Moore, authors of a recent report entitled "Rich States, Poor States."
Smart businesses move to low-tax states and, in many cases, individuals do as well. While there may be other factors at play—some people move to low-tax states such as Florida and Nevada because of low housing prices, for example—there's also evidence that low-tax states enjoy greater population growth. People move to where the jobs are, and over the last decade it is the no-tax states that are enjoying population growth 58 percent higher than the national average, Laffer and Moore report. One look at high-tax California's recent woes says it all: a state budget deficit that stands at a whopping $16 billion, a sinking economy, and 10.9 percent unemployment. It's no surprise that California's population growth has dramatically decreased.
What's happening at the state level in terms of people and businesses moving to low-tax areas is occurring internationally, too. In advance of the Facebook IPO, co-founder Eduardo Saverin renounced his citizenship in order to save on his tax bill. He's now worth about $3.8 billion, and as a resident of no-income-tax Singapore, he'll save millions in U.S. taxes. Buried in the coverage of Saverin's decision was this: A record number of Americans renounced their citizenship last year, more than double the number in 2009, in order to save on their taxes, too. That's sad. Record numbers of Americans renouncing their citizenship has to be the ultimate wrong-track indicator.