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Let’s say you leave a plate of raw liver on the kitchen counter and let the cat in. You leave the kitchen for an hour. Would anyone be surprised if the cat stole the liver? Would they blame the cat? In a similar fashion, if government establishes tax loopholes, can we blame taxpayers for taking advantage of the provisions?
Most economists, including us, are very suspicious of tax loopholes. We are even more jaundiced about tax benefits crafted for a single person or firm. The general thinking is that such tax policies do not promote economic growth. In addition, they violate notions of fairness and equal treatment under the law. That said, the only thing worse than an unfair loophole-ridden tax code is an attempt to ameliorate it by making taxes retroactive.
Suppose the federal tax code were to eliminate homeowner mortgage deductibility. We can imagine a reasonable debate over whether the elimination should apply to only newly issued mortgages or to all mortgages. What is beyond the pale is a law requiring taxpayers to pay back taxes on previous years’ mortgage deductions. A government might make champagne drinking illegal in 2017; it can’t, however, arrest you for having drunk bubbly at the 2015’s New Year’s Eve party. That, like retroactive tax code changes, is despotic.
Yet this is exactly what the European Union Commission seems bound and determined to do in the case of Apple Inc. It has ordered Ireland to collect some 13 billion euros ($14.6 billion) on what it claims are tax underpayments from 2003 to 2014. Did Apple get a great deal in Ireland? Well, yes. Did the Irish government establish a loophole in its tax code? Probably, yes. Did the Irish government give “selective tax treatment” to Apple? The evidence is based on so-called “comfort” letters the Irish government issued to Apple affirming Apple’s understanding of Irish tax law and how it would apply. “Yes, taxpayer, you understand the law correctly” is hardly evidence of chicanery!
Equally problematic is the uncertainty the ruling generates. It likely will take the EU courts up to five years to sort this all out. This is just as the world economy seems ripe for a slowdown because of rising protectionism accompanied by decreased world trade and investment. Uncertain taxes probably quash investment as much as high taxes. Should Apple pay more taxes? Maybe. But ex-post taxes are a bad way to get there.•
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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.
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