Senators Piling on Apple's Taxes Are Missing the Point
Senators had a chance to address the real issue behind Tim Cook's appearance this week before a Senate committee -- a revamp of the U.S. corporate tax code. They were on the right trail but following the wrong tracks. Their indignation at Apple for managing their taxes via overseas investments should shift to why America can't create a more favorable environment for businesses.
May 23, 2013 5:00 AM PT
So is Apple a tax-dodging evil company with a dark heart? No. The answer is no. However, Apple is certainly a corporation, and all corporations are driven first and foremost by profit -- no matter what the company says about the joy of making great products.
Astoundingly passionate and driven individuals, who sometimes run corporations -- perhaps like the late Steve Jobs -- might be driven by the joy of creation, with profit becoming just a tool to enable the chance to create a dent in the universe. But most corporations, particularly public companies, have a fiscal responsibility to drive down costs and maximize profitability.
Just as it produced better, more profitable tech gadgets than anyone else, Apple has also read the law and reduced its tax burden. How? By locating the source of sales and profit in international locations, more closely aligned to where Apple conducts business. According to Apple, 61 percent of its business comes from international locations. That number is growing.
It makes sense to keep funds for running the business closer to the locations at which the business is conducted -- after all, if Apple is investing in equipment with partners to ensure better production line efficiency in order to feed massive demand for its products, why reduce that ability by moving it home to America, letting a third of it get taxed, then moving it back out into the world? That's just bad business.
In fact, most of our major tech corporations, which are also global brands doing business around the world -- Microsoft, Yahoo, Google, HP, and many more -- leave their profit overseas or actively work to funnel and credit transactions through more tax-favorable locations.
So Apple Is Being Good?
Humans have a tendency to ascribe human characteristics and emotions to objects, as if cars have personality. Same for corporations. I've been guilty of it myself. Apple is only being good in that it's abiding by its fiscal responsibility to understand every aspect of its business and run it in the most profitable legal way possible.
If you're an investor or a Wall Street-type with a disabled sense of right and wrong, Apple's smartly run business might make you feel all warm and fuzzy.
However, the rest of us regular folks who don't have the reach or abilities to funnel our businesses outside of the U.S. are a little unsettled. Not because it's exactly unfair -- we're not international organizations and we have a hard enough time trying to deal with sales tax among our own 50 states and myriad of cities and counties. We're unsettled because Apple pretends so hard to be a California company.
That might be worth saying again. Apple pretends to be an American company, proud of being in California.
Is that just a pretense? Maybe. When intellectual property gets shuffled off to Ireland or elsewhere so that IP-related profits can hang out in a netherworld of little-to-no taxation, something seems amiss.
Try explaining this to your little girl: "Hey sweetheart, you know that cool invention that I came up with and patented? We moved the patent to Ireland -- yes, that's right, the land of leprechauns -- so that the patent, which we call intellectual property, can generate a pot of gold for us. But we have to keep it in Ireland otherwise America -- yes, we live in America, sweetie -- will reach its grubby hands into our pot of gold and take a bunch of it from us. And probably waste it, too. But sometimes we might be able to use some of that gold later somewhere else, maybe to hire people in less advantaged areas of the world so they can make things for us. So it's a circle of life, sort of. How cool is that?"
Proud to be American?
The thing that I find most troublesome isn't the globalization of commerce. It is the conflict of pride and identity. America's corporate tax code -- not to mention small business code, individual code -- is a freaking nightmare. It gets worse so that if America extended a tax holiday or reduced the tax rate on the repatriation of international profits, from a business standpoint there will always be another country with tax laws more favorable than those in the U.S. If you can save 6 percent even with a reformed tax code, a good many of your investors will expect you to (legally) save 6 percent.
Throw Gasoline on the Fire
The problem with the congressional investigation that led Tim Cook to Washington to testify in front of a committee of U.S. senators is the assumption that Apple is doing something fundamentally wrong -- that Apple should reduce its ability to grow and win in the marketplace by make unsound business decisions. As if paying taxes is a privilege.
Trouble is, living in America is a privilege. We're extraordinarily lucky to have been born here or even allowed inside. Lucky. When big businesses run away to chase global opportunity and yet pretend to love America, there's a fundamental tension here, pressure between tactical profits and building a stronger, more tightly knit community.
Can we expect that from our corporations? Maybe. But the answer doesn't come from punishing taxes -- the answer comes from incentives. We the people have to expect more from our companies, and we have to be willing to support American-made products and investment. At the same time, we have to expect more from our federal and local governments.
Small businesses choose to operate in some cities, counties and states over other jurisdictions because of more favorable tax codes. Corporations do the same thing on a global basis. If we simplify all these tax codes and make sure they are not only fair, but smart for business, then business can focus on business.
I expect our senators to be smarter than everyone else, to work harder to figure out a better American tax code -- not just close so-called loopholes. Patching a hole in an aging roof, so to speak, is not an answer: sometimes you need to tear it off and rebuild it. About every 30 years, in fact, if you're lucky and used good materials.
The fundamental point of taxation, in my mind, is that it's used to promote and enable American innovation, freedom and opportunity. Our government does a terrible job of aligning taxes -- revenue -- with outcomes. And here's a tell-tale case in point that makes me doubt their ability to fix anything at all:
The most indignant senator in this situation, it seems, is Senator Carl Levin, who has been widely quoted as saying that "no company should be able to determine how much it's going to pay in taxes."
What? Every company should be able to manage its taxes, to understand them -- because taxes are a cost of doing business. This stance assumes a position of arbitrary power that companies must simply accept. That's crazy talk. Alternately, it comes with a base assumption that our legislators are the arbiters of fair?
I fell out of my chair laughing when I read that. Ab workout done for today. Thanks, Senator Levin.
And yet, Levin is on the right trail but following the wrong tracks: He seems indignant (along with other senators) at Apple for successfully managing the cost of taxation, when the indignation should follow the reasons America is not able to create a favorable environment for businesses in our global marketplace.