How do Americans benefit from federal taxing of businesses?

Your visceral reaction to the following article may be anger that a wealthy corporation allegedly cheated on its taxes. You may be glad they were caught and now might have to pay the government $29 billion, plus penalties.

Or, perhaps not.

How a Maneuver in Puerto Rico Led to a $29 Billion Tax Bill for Microsoft
In the largest audit in U.S. history, the IRS rejected Microsoft’s attempts to channel profits to a small factory in Puerto Rico that burned Windows software onto CDs. by Paul Kiel, Oct. 13, 2023

A multiyear campaign to slash the IRS budget has left it understaffed and on the defensive. That’s been good news for tax cheats, the rich, and big corporations — but not for the poor.

What does “but not for the poor” mean? In what way are the poor harmed by Microsoft’s alleged cheating on its taxes? Let’s see if we can find the answer.

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In a long-awaited development, the largest audit in the history of the IRS has finally taken its next step. On Wednesday, Microsoft announced that the agency had notified the company that it owes $28.9 billion in back taxes, plus penalties and interest.

The case is epic not only in dollars but in scope. As ProPublica reported in an in-depth narrative in 2020, the IRS saw the case as a chance to prove the agency’s effectiveness.

Often cowed by the prospect of facing off against corporations with endless resources, the IRS set out to be bolder and more aggressive. It took the unusual step of hiring a corporate law firm to represent the agency, which incensed Microsoft. The company, along with others in its industry, responded by rallying allies in Congress to rein in the IRS.

In 2005, ProPublica wrote Microsoft “sold its most valuable possession — its intellectual property — to an 85-person factory it owned in a small Puerto Rican city.” Having struck a favorable tax deal with Puerto Rico, Microsoft then channeled its profits to the facility.

But earlier that same year, the IRS had set up a new unit to audit intra-company deals that sent U.S. profits to tax havens — deals that were especially common among tech companies like Google, Facebook, and Apple.

By the time ProPublica published its story on the audit in 2020, the two sides had sued each other, and one case had long been stuck in court. Almost three years after the last motions in the case, a ruling finally came down.

The judge sided with the IRS, writing, “The Court finds itself unable to escape the conclusion that a significant purpose, if not the sole purpose, of Microsoft’s transactions was to avoid or evade federal income tax.” He agreed with the IRS’ characterization of the deal as a tax shelter.

He wrote that the $29 billion that the IRS was seeking covered 2004 to 2013. He asserted, however, that the total, were the IRS to ultimately prevail, would be reduced by about $10 billion in taxes that Microsoft has already paid on its overseas profits.

A major feature of President Donald Trump’s 2017 tax bill was a requirement that companies repatriate those profits, though they paid a special, low tax rate when they did. Microsoft had stored up $142 billion in offshore profits by 2017.

The IRS attorneys who worked on the case believed it to be, by far, the largest U.S. audit ever, and the amount the IRS is seeking from Microsoft is several times larger than in any other publicly disclosed audit in the agency’s history. 

The case, in a way, is the last, great vestige of the IRS before it was gutted by budget cuts throughout the 2010s and corporate audits plummeted.

While the recent infusion of billions from the Inflation Reduction Act will allow the agency to rebuild itself in the coming years, the Microsoft case shows the fruit of those efforts could take a long, long time to reap.

Who are you rooting for, Microsoft or the IRS?

Consider these facts:

Congress’s “gutting” of the IRS left it struggling to prosecute big, money-rich firms for tax fraud because such effort requires huge manpower and many years of effort — neither of which has been affordable.

So, the IRS had to focus its efforts on smaller fish, like you and me, while the whales got away with paying at much lower rates.

Donald Trump, for example, paid $500 a year in taxes. Compare that with what you paid.

To be fair, much of his savings came from favorable tax laws rather than the tax cheating Microsoft allegedly did.

Either way, Congress has allowed the rich to pay a lower % of their income in taxes than the rest.

All tax dollars paid to the Federal government are destroyed upon receipt by the Treasury. (See: Does the U.S. Treasury really destroy your tax dollars? The Monopoly® answer. )

Federal taxes do not fund federal spending. The government pays all its bills by creating new dollars ad hoc.

Alan Greenspan: “The United States can pay any debt it has because we can always print the money to do that.”

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Federal taxes take dollars from the private sector, which impoverishes the economy. Federal deficits enrich the economy and facilitate economic growth.

If Microsoft pays the government the $29 billion claimed by the IRS, this will take $29 billion from the economy but do nothing to help the federal government pay its bills.

The government will not need to raise taxes to “make up” for the loss of $29 billion.

When ProPublica said that understaffing the IRS was good news for tax cheats “but not for the poor,” they could have meant two different things:

• The government would be short of funds to pay benefits to the poor or
• The IRS could focus on the poor, allowing the rich to skate.

The former is wrong. The federal government has infinite funds to pay for anything. The latter is correct, and the real purpose of understaffing the IRS is to make it easier for the rich to cheat on their taxes.

Why does the federal government collect taxes if it neither needs nor uses the dollars?

1. To control the economy by discouraging what the government doesn’t like and giving tax breaks to what the government wishes to reward.
2. To create demand for the U.S. dollar by requiring taxes to be paid in dollars.
3. To help the rich become more prosperous by widening the income/wealth/power Gap between the rich and the rest.

What should be done?

Unlike state and local governments, the federal government is Monetarily Sovereign, meaning it has the infinite ability to create its sovereign currency, the U.S. dollar. It never unintentionally can run short of dollars.

Therefore, the sole legitimate purposes of federal taxes are numbers 1. and 2 above. The general public should not be subject to payroll (FICA) taxes or income taxes, as these only take growth dollars from the economy and do not fund anything.

Contrary to popular myth, FICA does not pay for Social Security or Medicare. The federal government creates the dollars to pay for these programs, just as it does for Congress, the President, the Supreme Court, the Military, and every other federal agency.

Because no public purpose is served by extracting dollars from America’s businesses, company profits should not be taxed.

One could theorize that taxing profits encourages corporations to invest in growth, but we’ve seen scant evidence that businesses are not already motivated to grow.

It’s doubtful that taking tax dollars from a business aids business growth.

The third purpose of federal taxes should be to lift the middle- and lower-income groups by taxing the rich more to narrow the Gap between the rich and the rest.

This would require eliminating the myriad tax breaks and loopholes afforded to the rich re-defining “income” to include every kind of wealth increase while dramatically increasing the lowest amount of income that could be taxed.