Senators Levin and McCain: Two Peas All Up in our iPods

Earlier this year, Senator Carl Levin (D-MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R-AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.

These were my related, but more comprehensive, thoughts back in September:

Like too many other long-reigning fixtures on Capitol Hill, Senator Carl Levin (D-MI) doesn’t appreciate the magnitude of the challenge to the authority he presumes to hold over America’s job and wealth creators. Or maybe he does, and frustration over that fact explains why he besmirches companies like Apple, Google, Microsoft, and Hewlett-Packard.

Levin presided over a Senate hearing last week devoted to examining the “loopholes and gimmicks” used by these multinational companies to avoid paying taxes – and to branding them dirty tax scofflaws. Well here’s a news flash for the senator: incentives matter.

The byzantine U.S. tax code, which Senator Levin – over his 33-year tenure in the U.S. Senate (one-third of a century!) – no doubt had a hand or two in shaping, includes the highest corporate income tax rate among all of the world’s industrialized countries and the unusual requirement that profits earned abroad by U.S. multinationals are subject to U.S. taxation upon repatriation. No other major economy does that. Who in their right minds would not expect those incentives to encourage moving production off shore and keeping profits there?

Minimizing exposure to taxes – like avoiding an oncoming truck – is a natural reaction to tax policy. Entire software and accounting industries exist to serve that specific objective. Unless they are illegal (and that is not what Levin asserts directly), the tax minimization programs employed at Apple, Google, Microsoft, and Hewlett-Packard are legitimate responses to the tax policies implemented and foreshadowed by this and previous congresses. If Levin is concerned about diminishing federal tax collections from corporations (which, of course, reduces his power), the solution is to change the incentives – to change the convoluted artifice of backroom politics that is our present tax code.

Combine the current tax incentive structure with stifling, redundant environmental, financial, and health and safety regulations, an out-of-control tort system that often starts with a presumption of corporate malfeasance, exploding health care costs, and costly worker’s compensation rules, and it becomes apparent why more and more businesses would consider moving operations abroad – permanently. Thanks to the progressive trends of globalization, liberalization, transportation, and communication, societies’ producers are no longer quite as captive to confiscatory or otherwise suffocating domestic policies. They have choices.

Of course many choose to stay, and for good reason. We are fortunate to have the institutions, the rule of law, deep and diversified capital markets, excellent research universities, a highly-skilled workforce, cultural diversity, and a society that not only tolerates but encourages dissent, and the world’s largest consumer market – still. Success is more likely to be achieved in an environment with those advantages. They are the ingredients of our ingenuity, our innovativeness, our willingness to take risks as entrepreneurs, and our economic success. This is why companies like Microsoft, Apple, Google, and Hewlett-Packard are born in the United States.

But those advantages are eroding.

While U.S. policymakers browbeat U.S. companies and threaten them with sanctions for “shipping jobs overseas” or “hiding profits abroad” or some other manifestation of what politicians like to call corporate greed, characterizing them as a scourge to be contained and controlled, other governments are hungry for the benefits those companies can provide their people. Some of those governments seem to recognize that the world’s wealth and jobs creators have choices about where they produce, sell, and conduct research and development. And some are acting to attract U.S. businesses with incentives that become less necessary every time a politician vents his spleen about evil corporations. Not only should our wealth creators be treated with greater respect from Washington, but we are kidding ourselves if we think our policies don’t need to keep up.