“Apple and Taxes – What’s the Surprise?”

Sydney M. Williams

Thought of the Day

“Apple and Taxes – What’s the Surprise?”

May 1, 2012

The lead article on Sunday’s front page of the New York Times was an investigative article – the type that is written with a Pulitzer in mind – which dealt with Apple’s funneling of revenues and earnings to low-tax regions, including other countries and states. It was a dog-bites-man story, not a surprise.

There was much fascinating detail in the article, and the writers obviously did a lot of research. They pointed out that Apple earned world-wide pre-tax profits in 2011 of $34.2 billion and, worldwide, paid cash taxes of $3.3 billion – this despite a U.S. corporate tax rate of 35% and a California corporate tax rate of 8.8%. (In its 10K, the company listed its worldwide taxes – which include cash taxes, deferred taxes, and other charges – as $8.3 billion, or about 24% of pre-tax income.) The writers, Charles Duhigg and David Kocieniewski, were careful to point out that Apple did nothing illegal. Their story was aimed at illustrating the unfairness of a tax code whose complexity is such that it favors large multinationals who can afford the lobbyists in Washington (and Sacramento) to promote their particular cause, and the cost of high-priced lawyers in Cupertino to legally circumvent tax laws.

What the reporters failed to do, in my opinion, was connect the dots they uncovered. The tax code, like the several-thousand page Dodd-Frank Bill and Affordable Care Act, has become (to borrow a phrase from Niall Ferguson,) “a massive job-creation scheme for lawyers.” The Code’s very complexity is one reason why lower-income people and small businesses often pay higher rates than the very wealthy and large, multinational corporations. Solutions to the problem are simple – lowered statutory tax rates and reduced regulation – but the President and Congress don’t seem to care, even though such actions, based on historical precedent, would increase government receipts. Proposals to lower tax rates and to simplify the tax code’s rules by eliminating or modifying credits, deductions and exceptions have been dismissed. The most recent proposal came from Wisconsin’s Republican Representative, Paul Ryan, a man the President chose to publically belittle. Earlier, both the Simpson-Bowles plan (Obama’s commission) and the bi-lateral Congressional, Domenici-Rivlin, reform plan were ignored, by the President and by Congress. Tough decisions on fiscal matters are not part of the repertoire of either Congress or the President.

The other factor generally ignored by the authors of the Times piece was the unfriendly business climate that California has pursued for the last several years, turning the state that demographer Joel Kotkin once described as “God’s best moment” into a Biblical Egypt – a place of exodus. According to Mr. Kotkin, in an interview in the April 20th issue of the Wall Street Journal, the state of California has lost four million people over the past two decades. Leaving California are young, upwardly mobile middleclass families. Entering the state are poor immigrants, both illegal and legal. The state has become a haven for the very rich and a source of sustenance for the very poor. Social issues have preempted fiscal ones. Redistribution has been deemed more important than economic growth. Why would welfare recipients leave California with benefits that are far more generous than those offered in places like Texas or Nevada? Mr. Kotkin, who characterizes himself as a Truman Democrat, cites what he calls a “progressive war on the middle class”: high tax rates, a cap-and-trade law and environmental regulation that preclude the state from using its abundant natural resources. The result is a state that the tax Foundation has deemed the 48th worst in terms of business climate.

The principal beneficiary of California’s “new regime” (the name Mr. Kotkin uses for the state’s “progressive apparatchiks”, the bureaucrats who run the government) has been Texas, a state that cannot compare in terms of natural beauty, but one that understands that businesses are necessary for the health of an economy; so one that has fewer regulations and no income tax. Despite the large number of Mexican immigrants, Texas has a public school system that is better than California’s and a state university in Austin that rivals the highly touted California system.

For California, the results of their policies inevitably will be higher expenses and lower tax receipts; for, as the authors of the piece on Apple demonstrate, people and companies behave in their own self-interest, as they should and as one would expect. They quote the late Steve Jobs telling the City Council of Cupertino (Apple’s headquarters) that if they (the Council) are unhappy Apple could move. Joe Wiesenthal of “Business Insider” wrote Sunday that tax receipts for the first quarter of 2012 may fall short by $2 billion, about 30% of expectations of $6.7 billion.

States with mounting health and retirement bills coming due and with an anti-business climate are in for a rude awakening. While California is one of the worst, they are not alone. New York and Illinois are in equally bad shape. Caterpillar, a Peoria-based company is re-locating a plant back to the States from Japan. It declined to place the new plant in Illinois because of the state’s “business climate and overall fiscal health.” Steven Malanga, in Friday’s Wall Street Journal, quoted Chicago’s new mayor, Rahm Emanuel – not a known believer in fiscally responsible politics – on the need for Illinois to enact reform quickly: “You won’t recruit a business; you won’t recruit a family to live here.” For Mr. Emmanuel to make such an “heretical” statement, the situation must indeed be serious.

The consequences for Apple, stemming from the Sunday’s article in the Times, may prove bad public relations for the company and its shareholders. I don’t know. But if it does, it is nothing more than a red herring. Apple did not create the conditions that allowed them to pay less than 10% of their pre-tax income in the form of taxes. Their lobbyists may have helped, but the decisions were made by politicians, men and women elected by us, the people. Apple is owned by shareholders. It would be a failure of their fiduciary responsibility for management not to take advantage of every legitimate tax break offered them.

An unaddressed problem in the Times article is that states like California that pass legislation unfavorable to businesses, while offering unaffordable benefits to unionized state employees are leading many of these entities toward bankruptcy. The state of California and its municipalities, according to Stanford’s Joe Nation, have unfunded pension bills totaling half a trillion dollars. Mr. Malanga made the point that Illinois’ unfunded retiree health-care benefits amount to $3,399.00 per person, while the same bill for neighboring Indiana is $81.00. Leaders can make a difference. Republicans have been accused of imposing austerity measures and criticized for trying to bring some sense of fiscal responsibility to states. Mitch Daniels of Indiana, and now in his second term, has gone a long way toward reforming his state. New Jersey’s Chris Christie has been pilloried in the New York Times for attempting fiscal sanity in his state. Nevertheless, he is gradually making headway. John Kasich in Ohio and Scott Walker in Wisconsin (up for recall next month) have been making the tough, but correct decisions, as has Rick Scott in Florida. At the same time, left wing media has been relentless in their persistent condemnation of these people. In the meantime, Jerry Brown in California and Pat Quinn of Illinois continue to put their states at financial risk, while creating environments unfriendly to the very growth their economies need, while getting plaudits from the same media.

The benefits of having businesses locate in one’s state extend far past any corporate taxes collected. The individuals who work in the office or the plant pay local taxes, even when there is no income tax. More important, they spend money, money that has a multiplying effect as it swarms through the economy.

Only politicians can solve the problem of mediocre tax collections. Solutions are obvious, but difficult. They will cause some pain and more disruption. There are no easy answers; so putting off the inevitable only prolongs the agony. Do we take our medicine today or a larger dosage tomorrow? It should come as no surprise, even to reporters at the New York Times, that a publically held company like Apple should take full advantage of every tax loophole they are offered. The enemy, as Snoopy might have put it, is us, as we are the ones who placed these politicians in office. Placing the blame on Apple may serve a PR function, but provides no long-lasting solution.