Thursday, May 23, 2013

Thoughts on Tim Cook's testimony

I can't help but note the media's bias which is exemplified by a Bloomberg article that implies that Apple has avoided taxes by "shifting income ...  to offshore tax havens."

Given that Apple has fully complied with all applicable laws, why should anyone presume that corporations have a duty or an obligation to maximize their tax liability? Corporations' duty is first and foremost to maximize shareholder profit. Without profit corporations cannot exist. If corporations fail to maximize their profit they are wasting scarce resources.

Are financial journalists ignorant of the fact that the incidence of corporate taxes falls almost entirely on consumers? The bulk of any tax on corporate profits must eventually be passed on to consumers in the form of higher prices, since corporations must earn a minimum return on equity in order to remain in business. Corporations benefit society most by adding value to scarce resources and satisfying consumer demands, not by paying taxes.

Are politicians and journalists arguing that we would all be better off if the government took a much larger share of Apple's profits? Show me one example in which the government utilizes scarce resources more efficiently than Apple and I might agree that Apple should pay higher taxes. But I am quite comfortable believing that Apple can more efficiently utilize scarce resources than the government, and that therefore Apple's tax burden should be as low as possible in order to advance the common good.

I'm with Rand Paul on this:

“I’m offended by a $4 trillion government bullying, berating and badgering one America’s greatest success stories,” the Kentucky Republican told the committee. “Tell me what Apple has done that is illegal?”
“If anyone should be on trial here, it should be Congress,” he insisted. “I frankly think the committee should apologize to Apple. I think that the Congress should be on trial here for creating a bizarre and Byzantine tax code that runs into the tens of thousands of pages, for creating a tax code that simple doesn’t compete with the rest of the world.”
Apple has amply demonstrated the absurdity of our tax code by borrowing $17 billion to avoid paying taxes twice on money it has earned overseas. Apple is essentially engaging in an arbitrage in which it will pay less than 2% a year in order to avoid paying 35% on any overseas profits it might otherwise repatriate. When such a huge arbitrage exists (otherwise known as a "wedge" to economists) it is a sign of markets and regulatory structures that are seriously dysfunctional and inefficient. This is a compelling argument for reforming our tax code and sharply reducing the corporate tax rate. At the very least, the U.S. corporate tax rate should be no higher than it is in majority of the countries in which our businesses compete, and we should never impose a tax on money that has already been taxed in another jurisdiction.

Corporations should be indifferent to repatriating money earned overseas; they should never be penalized for doing so.

In an ideal world, the corporate tax rate should be zero and there should be no deductions. If Tim Cook made any mistake in his testimony earlier this week, it was in being overly generous in suggesting a compromise in which the corporate tax rate would fall to 20%. If there must be a compromise, then tax reform should employ a static-revenue-approach in which a lowering of the corporate tax rate is offset by the elimination of deductions.

I'd like to think that Apple came out ahead in this congressional battle, if only because it has logic on its side. I'd also like to think that this has been very instructive for the electorate, and that it has therefore advanced the cause of tax reform.

8 comments:

Benjamin said...

Corporate income taxes have shrunk much they have become a minor portion of federal revenues. Payroll taxes have soared in the last 30 years.

It probably is impossible to collect corporate income taxes---multi-nationals can always say profits were generated in oversea locations---so we might as well give up, and sub in a national sales tax and gasoline tax.

I mean, sheesh even a recent Presidential candidate kept his wealth in an offshore location, the Cayman Islands.

In a globalized world, taxing income may become impossible. Sales taxes might still work.

steve said...

in a perfect world we have 0 corp tax and 0 income tax. tax consumer spending and ALL of this nonsense goes away-including IRS scandals. of course, pols LOVE income tax because it gives them leverage over their special interests.

Hans said...

Very well stated, Mr Grannis! I am in complete agreement with your thoughts and I commend Sen Rand for his position as well...

Zero tax is not a perfect world but one which should be standard, as a corporate tax is simply one of many hidden taxes and a tax on a tax, as well.

I would also add, it is another reason why I do not read anything nor use which comes from Bloombag..

Donny Baseball said...

also, it is worth pointing out that Apple's $17B bond floatation probably generated handsome underwriting fess to Wall St. So, by keeping the Byzantine tax code in place, Congress rewards Wall St. And last I checked, Wall St donates significantly to election adn re-election campaigns...

Rich said...

What occurs in tech tax planning is that patents are transferred for no consideration to an offshore subsidiary in a low tax jurisdiction, and the US based corporation pays that subsidiary for use of the patents, thus landing income that would have been taxable in the US in the low or no tax jurisdiction.

AAPL is a US corporation, with a US management, US invented IP, and a large US consumer base. They benefit from the sanctity of contract in US law, as well as the education system that nourished their IP and fostered the education and training of Steve Jobs -and you really think that they shouldn't pay for the maintenance of the environment that has allowed them to grow and thrive?

You are utterly clueless on tax law.
Start with - http://www.propublica.org/article/corporations-couldnt-wait-to-check-the-box-on-huge-tax-break

then read -
http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?pagewanted=all&_r=0


I've been a securities analyst for 30+ years, and the tax avoidance that Apple, Intel, and the other tech firms now get away with would NEVER have been tolerated when less corrupt politicians, like Nixon- of all people- were in power.

Look at the profit margins of Apple vs other tech firms. Do you seriously believe that they aren't earning enough money relative to their competition, and that a normalized tax burden would be passed on to consumers???

William said...

Perhaps the most bezare issue of the US tax code is that the US government has the right to tax US citizen's income no matter in which country it is earned. Most countries DO NOT tax a citizen's income which is earned in another country.

The US taxes ALL income but does give a tax credit for foreign taxes paid - providing the tax payer doesn't have too many "deductions" or other "credits" according to their formula in which case they disallow a portion of the foreign taxes paid. It then becomes a deferred foreign tax credit for possible use in future years.

Trust me. I know this from foreign equity dividends earned by a brokerage account with a bank in Paris. Some years I may deduct rather little of the foreign dividend taxes paid.

John said...

Corporations are not people. They are legal constructs, essentially contracts that organize capital.

When considering how much corporations should be taxed, its fair to ask what corporations need and get from the government.

Do corporations benefit from government? Can the corporations function without government?

Bob said...

Rich, your post appears to me to be at the root of the ideological divide now consuming this country. Implied in your comments is that the government is entitled to it's due. Since Apple does pay corporate tax, and a very lot of it, it then becomes a question of how much. If they paid no or very little taxes, like that corporate crony GE, that would be one thing.

Apple pays plenty of taxes and owes nothing to the government. It does more than enough concerning what you call the maintenance of the environment. Your comments smack of socialism and communism. The health and welfare of the citizens should be by the citizens. The government, at all levels, and even though a necessary evil, does nothing efficiently, producing nothing, and adds almost no value to society. Governments are necessary to keep anarchy at bay, establishing and maintaining a rule of law, defense of the country, and basic regulations. After that it becomes an intrusive entity focused on it's own interests, it's own power, and ultimately it's domination of the society it is supposed to govern.

How much is enough?