Wanted: A Tax Code for the Digital Age

The US corporate tax code favors global companies over domestic ones, high-tech businesses over old-line manufacturers, and drugmakers over oil companies.

The U.S. federal corporate tax rate of 35 percent is the highest in the developed world. Still, the Treasury Department says the federal government bleeds $1.2 trillion a decade as battalions of lobbyists, accountants, and lawyers create and promote more ways to avoid taxes. The effect of the tax code on business behavior is clear when comparing Target and Amazon. Amazon, based in Seattle and founded in 1995, has made a series of moves to cut its tax bill since it became profitable in 2005. That year it established a European headquarters in Luxembourg, where the corporate income tax rate is 21 percent. The following year the company paid an effective tax rate of 49.6 percent as a result of selling assets to its Luxembourg subsidiary, according to its Securities and Exchange Commission filings. Since 2007, Amazon's effective tax rate has ranged from 27.9 percent to 21.9 percent. Executives at Amazon declined to be interviewed. By moving intangible assets such as patents and intellectual property to low-tax countries, Amazon could then pay its subsidiaries in those countries for the use of the assets, cutting its income in high-tax jurisdictions. The practice, known as transfer pricing, is a common strategy global companies employ to reduce taxes. Those techniques are not readily available to purely domestic firms.