Shock from Senators as Large Firm Attempts to Maximize Profits!

corporate income taxes“US Senators Accuse Apple of Avoiding Billions in Taxes,” reads the front page headline from the May 21 print edition of the Financial Times (link to online article here).  Before I started reading, I thought perhaps this beloved provider of all that is I-phone was guilty of a Leona Helmsley or Walter Anderson-style case of illegally not reporting income or padding expenses.  Come to find out, Apple is simply doing what economists refer to as “maximizing profits.”  They are avoiding taxes, not evading them, and there is a huge difference.  One is legal, one is not.

There is little doubt that the United States has an archaic corporate tax system that is trumped by more competitive corporate tax systems in other countries, even in lesser-developed nations.  Sadly, the United States can claim, “We’re number one!” when it comes to having the highest corporate tax rate in the world.  Of course, supporters of the status quo argue that U.S. firms don’t actually pay the published 35 percent top marginal rate.  True, the real rate paid on a firm’s share of profits is more in the neighborhood of 28 percent.  But many countries have a much lower effective rate as well.  Thus, it is no surprise that Apple is legally holding about $44 billion in offshore income that has yet to be repatriated to the United States.  Who can blame them?

Well, Senator Carl Levin sure does, although his subcommittee staff admits that “there was no indication that Apple had done anything illegal to minimize its tax bill.”

So let me get this straight: Apple (and many other firms and individuals) apply legal loopholes to avoid paying more taxes than they have to, because the corporate tax system is extraordinarily non-competitive, reduces workers’ wages, inhibits investment growth and lowers returns on capital. But the political solution is to haul Apple before a Senate sub-committee to explain their profit-maximizing behavior.  This makes about as much sense as asking me to explain the behavior of taking an alternative route in order to avoid a toll road.

More than a year ago, even President Obama stated, “Our current corporate tax system is outdated, unfair, and inefficient.” So what is keeping the reform ball from rolling?

Comments (11)

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  1. Jake says:

    The surest way to close loopholes is eliminate “loops”. If we want a fair and efficient tax structure without loopholes we’ll need something like a fair or flat tax.

  2. Zeratul says:

    Are there any OECD countries that follows a tax structure that is efficient and is a model we all can follow?

  3. Penn says:

    Easy solution to this problem. Remove loopholes, lower tax rates. Win-Win

  4. Wasif says:

    Politics and bureaucracy, oh my god, are so annoying. They just mess things up, even an American icon like Apple has to deal with their crap. I don’t blame them for having the $40 million in some tax haven, I have no doubt that money can be put to good us in more research and development as a oppose to the government!

  5. Dewaine says:

    The government is mad that we find ways to prevent them from stealing our money? Keep it up!

  6. Lewis Warne says:

    On the plus side, loop holes create jobs for the accountants that avoid them! Transfer pricing is a growing consulting field. Deloitte’s group grw 20% over the past two years.

    http://careers.deloitte.com/tax-transfer-pricing/

  7. Joe Barnett says:

    It’s important to distinguish Apple’s profits from its revenues (income).

  8. Pam says:

    @Lewis. Yes, I’m sure accountants are happy. In fact, if I recall, the Big 3 accounting firms benefited greatly from the passage of Sarbanes Oxley even though it has cost billions in compliance to firms who could better use the money on R&D.

  9. Kyle says:

    I would say more than a little happy. Billions are spent on compliance — the Laffer group put a $400 billion ceiling on it.

    Steve Jobs addressed this a few years ago. He came right out and said they were moving to China because it made economic sense to do so. Sad that we’re growing an entire generation of people who don’t understand incentives.

  10. Harley says:

    Inflows from repatriation holidays should have given Congress a big clue. Unfortunately most of those loopholes were bought and paid for.

    Sure Obama said that, then summarily dismissed the B&S report he commissioned. Good thing taxes was such a big part of the last election… because, you know.. it’s like trying to explain profit maximization to Cookie Monster.

  11. Daniel Dyer says:

    The only real reform of the broken tax system is the Fair Tax. Go to YouTube.com and search on “63 Reasons for the Fair Tax”.

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