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Apple Avoids Millions in Taxes – Say It Ain’t So

Posted in Social Policy

As readers of this blog know, I am in the tank for Apple.  As I’ve said before, if Apple made a car, I’d buy one.  Suffice it to say, I would buy anything they put their name on—even if I didn’t know what it did.  So what do I think about the recent front page New York Times article by Charles Duhigg and David Kocieniewski documenting the great lengths Apple goes through to avoid and minimize its tax exposure?  Well, my feelings are mixed.

On the one hand, they aren’t doing anything illegal.  They are being smart.  Just like they are smart in designing and marketing a new product.  So I begrudgingly applaud their acumen.  That acumen is demonstrated by Apple’s establishment of Braeburn Capital in Reno, Nevada to collect and invest its profits.  Moving profits away from its California headquarters reduces state corporate tax from 8.84% in California to 0% in Nevada.  What’s more, Nevada has no corporate gains tax, sheltering Apple from taxes on more than $2.5 billion earned on its cash reserves.  Additionally, Apple filters profits earned abroad through tax shelters like Ireland, the Netherlands, Luxembourg, and The British Virgin Islands—always avoiding high tax jurisdictions, regardless of the origin of a consumer’s purchase.

What’s wrong with all that maneuvering?  Indeed, they have a duty to their shareholders.  Management is merely the stewards of the great wealth created by the company and they would not be good managers if they paid billions in taxes that they could rightfully avoid.  I would expect nothing less from one of- (okay)- the world’s greatest consumer products companies.

On the other hand, if Apple doesn’t pay taxes, where does government get the money to pay for roads and schools and health care for the poor and elderly?  It’s a zero sum game folks and for every dollar Apple saves, someone else has to pay—or worse, the services aren’t provided.  Roads and bridges aren’t fixed, schools crumble and health care is reduced for the poor.  Now it’s not all on Apple for sure, but don’t they have some civic responsibility?  And even if not, as the biggest of the big boys, aren’t they benefited from a healthy state economy?  (Folks have more money to buy iPhones and download every season of The Wire on iTunes.)

So, when the largest corporation in the history of the nation is paying less in taxes than the average citizen, who is to blame?  Although I would like to see Apple be less strategic when it comes to taxes (save that creativity for the iPad 4), the ultimate problem is the U.S. Tax Code.  A tax system designed for an industrial world simply can’t work in the modern age of e-commerce.

When you go to the hardware store in Pennsylvania to buy a hammer and you hand over your $10 bill, the local merchant can’t pretend he received that money in Nevada—thus avoiding state corporate taxes.  However, when you buy a song on iTunes, the server processing your request could be located in any number of states.  Thus, there will always be a state (think Nevada, Delaware, North Dakota, North Carolina) willing to accommodate businesses like Apple.

The only reasonable solution is a federal one.  And it makes sense.  Consumer monies are traveling across state lines in interstate commerce only to be kept from the tax authorities at the expense of the rest of us.  That’s right.  We can’t forget that when Apple (as well as other companies) doesn’t pay its share, it’s the rest of us who suffer either in the form of higher taxes or less effective government services.  Have you noticed all those post-winter potholes popping up?

I’ll concede that, depending on how you look at it, American corporations are taxed at the highest rate in the world (counting both state and federal taxes).  However, the argument that Congress therefore cannot raise corporate taxes is simply wrong.  First of all, as demonstrated by Apple’s conduct, American corporations do not pay such high taxes.  Second, closing loopholes in the current federal system will not ameliorate the problems of tax forum shopping.  Third, capitulating to corporate demands of a “repatriation holiday” where foreign profits can be brought back home tax free is not advisable.  If corporations refuse to bring the money home, simply reconfigure the tax laws to include certain profits held abroad in the definition of profits “earned” in the U.S.  Finally, regardless of changes in corporate taxes, neither large nor small corporations will flee our shores for less expensive pastures.  The small companies can’t afford such a change and the large ones, even if they could afford it, could not practically accomplish it.  Is it any wonder that top executives of American corporations all live in the U.S., that they are mostly educated in the U.S., and that the best young talent still comes from American schools?  No.  A fear that higher, effective, and just taxes will scare companies away surely belies any professed belief that America (for reasons beyond its tax code) is the best place on earth for companies to build the economy.

Our reliance on an outdated tax system is costing tax payers—folks on Main Street—millions of dollars.  Congress, it’s time to act.