According to page B1 of the December 4, 2015 Money Section of USA Today, the top ten U.S. multinationals with large cash hoards that are classified as “foreign reinvested earnings” are the following: General Electric ($119 billion), Microsoft ($108 billion), Apple ($91 billion), Pfizer ($74 billion), IBM ($61 billion), Merck ($61 billion), Cisco ($58 billion), Johnson & Johnson ($53 billion), Exxon Mobil ($51 billion), and Google ($47 billion). With the exception of Exxon, every single one of these companies pays an effective tax rate below the prevailing 35% rate that is the standard federal share of profits before deductions.
This is a topic that generates more controversy than it should. Tonight, when Apple CEO Tim Cook appears on “60 Minutes”, he will receive intense questioning from Charlie Rose that suggests Apple is evading its tax obligations. CEO Cook does not take kindly to the insinuation that Apple is a tax dodger, and he refers to the accusation as “total political crap” and iterates that “Apple pays every single dollar of tax that we owe.”
Cook adds: “It would cost us 40% to bring it home, and I don’t think that’s a reasonable thing to do. This is a tax code, Charlie, that was made for the industrial age, not the digital age. It’s backward. It’s awful for America. It should have been fixed many years ago. It’s past time to get it done.”
On this matter, Cook is absolutely 100% rational in his opinion. The repatriation tax is something that United States was able to get away with in the post-Marshall Plan world in which the United States was the only country left standing with clear stability of financial capital after the Second World War. In the 1950s through 1990s, the United States was able to attach taxation to money earned outside the United States because there was no realistic alternative for corporate CEOs. The 35% tax, which was coupled with the financial stability of the United States, was far superior to the concept of avoiding this punitive taxation by taking on less financial stability to base operations in a country like Ireland.
But the relative financial strength of the United States had declined in recent decades as the rest of the world stabilized and prospered. Many people try to make a moral argument, saying that paying taxes on money earned abroad is the right thing to do for a corporate executive. But that argument is not persuasive. It is a stretch of the imagination to suggest that Apple China, a subsidiary of the Cupertino-headquartered Apple Inc., should pay 35% in taxes to the United States government because the company is headquartered here.
But the Apple Inc. in the United States has nothing to do with the experience of generating the profit. Apple China sells the iPhone made in China to a Chinese consumer, and then seeks to transfer that cash back to the United States. It is a stretch to suggest that the act of moving the funds from the China to the United States is an act that deserves a 35% haircut. The rationale offered by the United States Congress is that the intellectual property created by Apple was originally nourished and cultivated in the United States, and the money should go to the federal government to build an economic-regulatory framework that can continue to be fertile soil for such innovation and financial stability.
As a result, you create a disaster incentive system. Instead of bringing back money to the United States to hike the dividend by a substantial amount or invest into new U.S. operations that could result in jobs and increased product sales, companies like Apple are incentivized to exhaust every possible option in a foreign country to deliver growth abroad to avoid the 35% haircut that follows.
If someone wants to oppose how multinationals approach taxation matters, it would be much more persuasive to discuss the extensive lobbying efforts that result in tax code changes that benefit the firm specifically without any other pro-social purpose. Or, to suggest the tax discounts that result from recruiting and maintaining corporate headquarters that create a perverse outcome in which larger companies pay lower tax rates than smaller peers or pay lower taxes than established companies that have been supporting the community for decades. The moral argument in those areas of corporate taxation are much stronger.
But Tim Cook is correct when he states that Apple Inc. pays every bit of tax that the firm owes, and Charlie Rose (and similar questioners) do not possess the moral high ground that they think they do when they complain about foreign earnings that remain stacked overseas. Personally, I find it the height of arrogance to suggest that a subsidiary selling a product outside the United States to a customer that has nothing to do with the United States should merit U.S. receipt of 35% of the funds because America at one point nurtured the seedling of that transaction.
In the meantime, you have a situation where congressional inaction results in lower dividend disbursements in the 401(k)’s of American workers this Christmas season, fewer jobs created in America because multinationals are heavily incentivized to take profits created outside the United States and keep them there, and it even results in the loss of American political influence when these firms resort to corporate inversions to resolve the inequity created by the U.S. Tax Code regarding repatriation of foreign earnings. The real issue, I think, is that Congress knows it could get away with this during the Marshall Plan era but has no idea how to sell this to constituents that would regard this as an act of corporate welfare when Apple brings back $91 billion to the United States without paying a dime of taxation on it. There is a cognitive dissonance that occurs when you try to explain to someone that an Apple product made with Chinese parts in China and sold to a Chinese customer should confer no moral imperative to give 35% to the United States government because Steve Jobs brought to market the original phone in early 21st century America.