Apple, Taxes, & the Silly Investment Argument

22 May


Apple CEO Tim Cook testified before Congress this week regarding the low overall amount that Apple pays on its earnings, much of which is overseas.  Some quick thoughts:

  1. The corporate tax code (and personal as well) is insanely complex.  This complexity creates an untold number of deductions, exemptions, etc. for companies to utilize to lower their tax rate.  Complexity in rules creates opportunities for avoidance.  The code should be simplified.  It would make it easier for the government to enforce, easier for companies to structure their tax policies, and would offer a win-win for companies (reduced compliance costs, better transparency, etc.) and the government (more revenue, easier enforcement).
  2. It’s not the job of Apple or any other business to decide the right level of taxation, set optimal social policy, etc.  The system is set up in such a way that it asks companies to maximize revenue and profit to the extent that they aren’t doing anything illegal.  If we want to change the system, fine.  But Apple is only playing its role (maximize profit to the extent legal) within the framework that we/Congress have created.  
  3. Similarly, if we want Apple or American businesses to pay more in taxes, we should change the tax code.  Nobody is accusing Apple of doing anything illegal.  They’re simply following the law, which happens to be extremely complex and allow for the type of tax structuring that Apple has followed.  If Congress is unhappy with Apple, then change the rules.
  4. Finally, this whole episode is bringing up the issue of what we should do about overseas cash that companies have sitting in offshore accounts.  In a nutshell, multinational US companies earn money overseas.  If they repatriate that money back to the US, they have to pay US corporate taxes on the overseas earnings, whereas many other countries don’t tax earnings outside their borders.  So cash sits overseas.  US companies have over $800b of cash sitting abroad.  Apple has about $100b of it’s $145b total abroad.  We need a way for US companies to bring some of this overseas cash into the US.  

There’s no sign that under the current regulations any US company plans to repatriate cash.  This is bad for the companies and it’s bad for the government since we’re earning no tax revenue on these earnings.  I don’t know what the right rate is for these overseas earnings, but it should be something that’s broadly acceptable to most companies as well as the government.  

Having said that, I don’t buy the argument that simply letting companies repatriate their cash with a lower tax burden is going to somehow spur new investment.  US companies, including Apple, are already sitting on record levels of cash here in the US.  If they want to invest in the US, they already have plenty of cash to do so.  The reason they aren’t investing isn’t a lack of cash, it’s a lack of aggregate demand from consumers and other businesses for the goods/services that businesses are selling.  Changing tax rates won’t solve this.  

We could lower Apple’s tax rate to 0% tomorrow and that won’t change the investment decisions they make.  Businesses are rational.  If Apple saw growth opportunities they could capture by investing in the US, they would do it irregardless of tax rates.  They have plenty of cash to do so.  

This also gets to some of the arguments around businesses and employment.  Many people argue that if we lower the corporate tax burden, this will kickstart hiring by companies.  The same argument applies.  The reason companies aren’t hiring more aggressively isn’t a lack of cash/margin to do so, it’s principally a lack of demand and other factors like increasing productivity from existing workers.  If order books, foot traffic, etc. were growing at a brisk pace, companies would hire to meet the demand.  Absent that, why would they hire additional workers?  

Some of this logic might not apply to small and medium size businesses.  For business with less scale, lowering their tax burden might provide those businesses with the additional capital they need to make investments.  Would love to hear a strong argument why this is also the case with large businesses.  


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