“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More than a year ago, even President Obama stated, “Our current corporate tax system is outdated, unfair, and inefficient.”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?