Apple on the Hill: What Can be Learned from Yesterday’s Hearing

May 22nd, 2013 at 9:04 am

“…we are deeply committed to our country’s welfare.”  Apple CEO Tim Cook at a hearing yesterday focused on the company’s extensive tax avoidance.

OK…I’ve got no reason to question that assertion.  I suspect Mr. Cook and other execs over there are thoroughly patriotic.  But they are also unquestionably “deeply committed” to their bottom line and their shareholders, as they should be.  And herein lies the problem: it’s at the intersection of our broken business tax code and the competing interests of our nation’s welfare and corporate profitability.

There are lots of reasons why we want innovative businesses like Apple—the Senators fell over each other to tell Cook how much they love their iPads—to be profitable.  It invokes the virtuous cycle of innovation, consumer satisfaction and demand, growth, innovation, etc.   But part of that cycle should also spin off revenue to support the nation’s welfare, not least of which are its public goods that educate the future workforce and support the public infrastructure that’s complementary to corporate success.  Even global companies like Apple, with 2/3’s of their revenues from abroad, need quality roads and ports and airports and water and (especially) communications systems.

The current tax code—specifically the treatment of overseas earnings—breaks that last part of the cycle.  Innovative, global firms are perfectly able to achieve great success re sales, profits, and share prices.  That’s why it’s always so discordant to me to hear them complaining all the time about taxes and regulations.  But because they can indefinitely shield their foreign profits from US taxes, meanwhile engaging in endless (legal) schemes to avoid taxes in countries where they book those earnings, the link between the profitability of American companies and the well-being of America is broken.

Moreover, the fact that multinationals have such a pronounced tax advantage over solely domestic firms creates a deeply perverse incentive to produce abroad versus here.

I grew up in an era where you could make a case that what was good for GM was good for America.  As they did better, their products made us better off, and they in turn helped to pay for the public goods that are essential to improving living standards in an advanced economy.  But can you make that case today?  Yes, many enjoy Apple products—I’m a PC guy, so perhaps I should recuse myself from this whole debate—but the feedback loop just described is broken.

In that regard, when Cook says “we don’t depend on tax gimmicks” he’s being far less credible than in the opening quote above.  In between gushing over cool apps:

…lawmakers accused Apple of setting up an elaborate system overseas to stash cash and avoid tax payments on at least $74 billion in profits between 2009 and 2012, facts that were uncovered in a Senate investigation on Monday.

The problem isn’t Cook or Apple.  They’re following the incentives we’ve set up for them and they alone cannot resolve the split those incentives engender between country, profits, and shareholders.  Therefore, instead of wasting time with these types of ambiguous investigations, what Congress should be asking is how can we shut down the vicious cycle and restart the virtuous one?

As economist Eileen Appelbaum points out here, moving to a territorial system, where foreign profits go largely untaxed at home, would only deepen the already too-strong incentives to produce abroad.  A better idea is to close the deferral loophole and use some of the extra revenue to lower the rate.  Eileen links to another interesting idea that’s getting more attention: moving international firms to an apportionment model.  Under that framework, a firm’s liability in a given country would be determined by their share of sales, employees, or property (or some combination of those shares) in that country.  This immediately shuts down offshore Cayman accounts since none of those factors exist on those lovely beaches.

Those are the directions to go with corporate tax reform.  The guiding principle here should not be to haul executives in front of the Senate so that they can profess their love of country.  It’s to craft a code that puts their money where their mouth is.

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14 comments in reply to "Apple on the Hill: What Can be Learned from Yesterday’s Hearing"

  1. smith says:

    A guiding principal should also be to raise corporate tax rates.
    a) That’s where the money is.
    b) Corporations have drastically lowered historic R&D investment, government needs to fill that gap.
    c) Taxing profits encourages wage growth by effectively discounting labor costs.
    d) It works. Higher corporate tax rates correlated with better economic performance in the past.
    e) It shows the difference between the politicians who care about corporations and the wealthy, and politicians who care about working people.
    f) Higher corporate taxes could mean lower rates for the middle class, fairer funding of pre-school, or European style higher education subsidies to maintain competitiveness.
    g) Lower corporate rates are a huge factor in inequality, lowering effective rate of rich stockholders in comparison to previous era. see work of

    • Pablo says:

      Silly stuff. Practically every other country is lowering corporate taxes to be come more competitive. One can argue that there should be no corporate taxes, since shareholders pay at the individual level.

      See Canada for a great example of tax policy and federal spending restraint.

      • Amit says:

        Yes, one (and only one) can argue that there should be no corporate taxes. The infrastructure that companies need to function in countries will be built by the companies themselves, and of course there are functioning examples of such economies (not).

        Also, did you stop to think about incentive/redistribution effects when you said that corporate taxes can be reduced to zero since individual shareholders pay the lower 15% capital gains/dividend taxes vis a vis ordinary income? While we’re at it, perhaps you think that all countries should scrap individual taxes too, since “job creators” can play countries off each other just like companies do now.

        Dear god man, this is an economics forum, not a fantasy Galt’s Gulch.

      • smith says:

        It would be a mistake to lower corporate tax rates because everyone else was doing it. If everyone else jumped off the George Washington Bridge, should we?

        We’re a low tax country in need of greater revenue to fund education and research and development that corporations used to pursue.

        The case of Apple shows effective rates are too low, reform should close loopholes without trading votes for lower rates. A bidding war over tax breaks or rates is no way to build an economy. Progressive corporate taxes helps small businesses compete. Corporate taxes are also a huge deal in rising inequality. [ibid]

    • Robert says:

      Higher corporate taxes will drive companies to locate outside the US. Your comments were not well thought out in my opinion. Higher rates years ago were accompnied by more loopholes. Higher corporate tax rates will not increase wages, it will have the opposite effect.

      • smith says:

        Where they gonna go? Look at the chart The U.S. is a low tax country. Corporations may mistakenly view countries with lower corporate rates favorably, but you shouldn’t view the other forms of taxation which are higher in those countries as substantially different in affecting overall costs. Ultimately, money taken out of a closed system in the form of taxation subtracts from resources available to the corporation. The high Value Added Tax in most of the EU covers exports from those countries too, so relocation doesn’t work.

        The past-higher-rates-always-had-more-loopholes making effective rates lower is an urban myth. That’s actually true for both corporate and personal rates. The Apple story only serves to expose not just the current loopholes, but their tax blackholes.

        Higher corporate tax rates will increase wages by making taxes more progressive (stock held disproportionately by rich), and deductible wages costs less expensive. It directly addresses inequality.

  2. Bart says:

    A member of an all-Mac family, I have begun to doubt that Apple has done enough to pay back the community for its hard-earned success.

    I’d like to see the family do more world-wide charity work like the Gates are doing.

  3. save_the_rustbelt says:

    Another problem is that the medium sized family construction company, with very few tax avoidance options, is paying 35%.

    If the company tries to mitigate by increasing salaries of family executives, the IRS beats them down with an “unreasonable compensation” claim.

    Little wonder so many new companies are “S” or LLCs, but that strategy has limits as well.

  4. readerOfTeaLeaves says:

    the link between the profitability of American companies and the well-being of America is broken.

    I hope that someone at CNBC or WSJ comprehends what you’ve written here, because I don’t think they get it yet.

    I made time to watch/listen to much of the Senate hearing, and the range of perspectives among the senators was mostly discouraging.

    Cook made a key point that IMVHO went right over the heads of those senators, and probably a lot of the staff. He said, (Please) simplify the tax code.

    One of the Apple execs mentioned that their annual US tax submission is almost two feet tall. If that isn’t a metaphor for ‘the tax system is far, far too complicated and cumbersome’, then I don’t know what better evidence could be offered. And yet, I didn’t see that key point mentioned in the NYT or Guardian news reports.

    Cook’s BA is in Industrial Engineering.
    If you spend much time around engineers, it becomes fairly obvious that ‘simpler’ tends to work best in most cases.
    Steve Wozniak (‘the Woz’) is/was a legendary engineer, in part because of his ability to simplify, simplify, simplify. The more a design is streamlined, the more you reduce the chances of errors.

    As an observer to this public conversation, what struck me is that none of the senators followed up on Cook’s point about why it is important to simplify the tax code.

    And heaven help me, Sen Rob Portman seemed well intentioned, but far more worried about protecting corporate profitability than public welfare. (He still seems to think that what’s good for GM is good for America, not realizing GM is now a multinational, whose majority owners are not necessarily Yankees). He should read Rothkopf’s “Power, Inc.” or at least one article:

    Levin understands the tax issues are global problems, but I’m not sure the rest of his committee has a clear sense of what is going on.

    The profitability of corporations is partly a function of tax structures. Aligning corporate profitability with public welfare is a critical problem in the world today. Broken linkages not only bad for the public; over the longer timeline, they are also bad for corporations that need a healthy customer base.

    BTW: Doesn’t matter whether you’re an Apple fan, or a ‘PC guy’. The supply systems of components for computers and devices are all multinational. And given the complex supply chains required, the necessity for companies to cross jurisdictions and tax regimes is inevitable. Corporate structures have advantages over nation states in this environment, so perhaps an apportionment model could begin to solve the problem of broken linkages.

  5. Fred Donaldson says:

    There is a certain arrogance at the leadership of tech firms, and how they treat taxes, as well as their current Visa methods (which threaten to get worse under the “compromise” Hatch/Durbin agreement):

  6. PeonInChief says:

    Unitary taxation is just easier when dealing with multinational corporations. Third World countries learned this a long time ago.

  7. David C says:

    As far as I know, the US is the ONLY country that thinks profits earned by international subsidiaries should be taxed in the home country. Every other developed country believes that profits should be taxed in the country where they are earned. I gather that Ireland has created a bit of a loophole in this principle, but many, many other countries abide by it.

    It goes further. In Sweden, for example, employees pay no income tax for work days that they spend outside of Sweden.

    My local colleagues shake their heads in amazement when I tell them I have to pay income taxes on my pensions in both Switzerland and in the US. They cannot understand why the US thinks they have a right to this money.

    • smith says:

      Because the U.S. spends so much to keep the world safe and thus economically vibrant, especially for U.S. companies, a fairer tax system would assess foreign countries corporations and populations too, especially EU, Japan, and Korea, let alone, corporations with foreign operations.

      Other countries also are a lot more restrictive in how they let their own businesses ship jobs and industry overseas, and how receptive they are politically, financially and culturally to imported products.

      The true crime would be if the U.S. allowed the repatriation of foreign earnings without tax, thus encouraging U.S. corporations to keep exporting jobs at no cost. There is a reason why Apple abuses tax shelters rather than just relocating.

  8. Bud Meyers says:

    When you and others say that the corporate executives of Apple (and others) are only doing their jobs, increasing share value for their stockholders, it should be noted that their largest stockholders are mostly huge institutional investors (banks, private equity firms, and hedge funds) who buy and sell huge blocks of stocks (in the millions of shares).

    And the senior execs (with their stock options) are usually the next largest shareholders, so they are working for themselves (incentive pay). Also, these same corporate executives often sit on each others board of directors in other companies. So again, they are working to increase share value for themselves (e.g. stock buy backs, etc.)
    The third largest group of shareholders are the private traders who are generally wealthy to begin with. Most people in the lower income brackets don’t own stock, and if they do, it’s through a pension, 401k, or an IRA retirement account — who pay tax at ordinary tax rates according to their income bracket — and pays a penalty for early withdrawal — they don’t get the preferential capital gains rate the the execs get, nor do they have all the loopholes that these huge corporations enjoy.
    Under “investor relations” on their corporate websites, they boast of low “effective tax rates” as a selling point to enlist new investors. Beating the government (aka the tax man aka the American people) is seen as a “positive”, not creating jobs, improving our infrastructure, or funding public schools. These multinationals have no borders or any particular patriotic loyally, except they rely on our laws, courts, police and military to protect them and their business interests, both here and abroad. They would have men and women in our Armed Forces die for them, but won’t give the survivors jobs when they return home.

    And it’s not just companies in the technology industry that are avoiding taxes, other companies, such as those in the apparel industry (like as Nike) also does; and they all use exploited labor in Asian countries to displace American workers to also avoid safety and other regulatory laws.

    It’s our government that, for years, has allowed this happen. We have over 74,000 pages in the IRS tax code that are mostly corporate tax loopholes. For ordinary Americans, 50% of the work force nets less that $27,000 a year, and uses a one-page 1040EZ form to file their tax returns; whereas people like Mitt Romney files a 500-page tax return and deducts $25,000 a year for the maintenance of a horse as a medical expense, because it “makes his wife feel better”.

    The entire system is rigged for big businesses and banks, because with their financial influence, they have rigged our politicians to write the laws that are most favorable to them.
    And then when we become unemployed (or are forced into low-paying jobs without healthcare or retirement benefits) and need to rely on government assistance, they claim that they owe us NOTHING, but yet they seem to think that we owe them EVERYTHING.

    Apple is Still Rotten to the Core