Four Reasons to Applaud Apple’s Tax Planning

By
Daniel J. Mitchell

The Senate is holding a Kangaroo Court designed to smear Apple for not voluntarily coughing up more tax revenue than the company actually owes.

Here are four things you need to know.

Apple is fully complying with the tax law. There is no suggestion that Apple has done anything illegal. The company is being berated by politicians for simply obeying the law that politicians have enacted. What’s really happening, of course, is that the politicians are conducting a show trial in hopes of creating an environment more conducive to tax increases on multinational companies (this is in addition to the OECD effort to impose higher tax burdens on multinational firms).

It is better for Apple to retain its profits than it is for politicians to grab the money. If Harry Reid, Barack Obama, and the rest of the crowd in Washington are able to use this fake issue as an excuse to raise taxes, the only thing that changes is that the tax system becomes more onerous and politicians have more money to spend. Neither of those results are good for growth, particularly compared to the potential benefits of leaving the money in the productive sector of the economy.

Apple shouldn’t pay any tax to the IRS on any of its foreign-source income. A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS since the income already is subject to all applicable foreign taxes (much as, say, Toyota pays tax to the IRS on its US-source income). Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.

If Apple is trying to characterize US-source income into foreign-source income, that’s because the US corporate tax system is anti-competitive. Multinational companies often are accused of “abusing” transfer-pricing rules on intra-company transactions to inappropriately turn US-source income into foreign-source income. To the extent this happens (and always with IRS approval), it is because the American corporate tax rate is now the highest in the developed world (and the second highest in the entire world), so companies naturally would prefer to reduce their tax burdens by declaring income elsewhere. So the only pro-growth solution is lowering the corporate tax rate.

It’s worth noting, by the way, that the Tax Foundation recently estimated that the revenue-maximizing corporate tax rate is 14 percent.

So if the anti-Apple lynch mob actually wants more revenue, they should learn a Laffer Curve lesson and slash the corporate tax rate.*

*I want to maximize growth, not maximize revenue.

Topics: 
Tax and Budget Policy

The “I-Word” Isn’t a Curse

By
Gene Healy

I’m not convinced that any of the recent scandals roiling the Obama administration constitutes an “impeachable moment,” but, as I argue today in the Washington Examiner, there’s something wrong with a (post-?) constitutional culture where opinion leaders treat the very invocation of the “I-word” as akin to screaming obscenities in a church.

Impeachment talk is “industrial strength insane” says the Daily Beast’s Michael Tomasky; “serial madness,” per Richard Brodsky at the Huffington Post; Rachel Maddow compares it to incontinence; and for the Atlantic’s Philip Bump, it’s like the inevitable idiot in the comments thread invoking Hitler. True, Salon’s recent listicle of 14 “crazy times” right-wingers have called for Obama’s impeachment consists mostly of frivolous, even loopy proposals; but it also includes Bruce Fein’s 2011 call to impeach Obama “over the military intervention in Libya, alleging that it violated the Constitution’s mandate that only Congress can declare war.” Crazy talk!

Also in the Atlantic, “communitarian” godfather Amitai Etzioni moans “I see no way to protect the president and all of us from the second term curse” in a piece titled, “Why It Should Be Harder to Impeach a President.“ 

“Harder”? A “reality-based” communitarian Etzioni ain’t. In our 224-year constitutional history, we’ve only managed the feat twice—three times if you count Nixon, who resigned before the full House got to vote. How much harder can it get?

And when did calling for—even musing about—a president’s impeachment become a form of secular blasphemy—the American version of Lèse-majesté? 

Given what the mid-’70s Church Committee hearings revealed about presidential abuses of power, at a minimum, all three presidents of the ’60s deserved to be impeached and removed from office. Of the seven presidents since Nixon, I can make a case for impeaching at least four.

As Ben Franklin put it at the Philadelphia Convention, the impeachment power is “the best way… to provide in the Constitution for the regular punishment of the Executive when his misconduct should deserve it, and for his honorable acquittal when he should be unjustly accused.”

Our problem isn’t too many impeachments, but too few.   

Topics: 
General, Government and Politics

Who’s Afraid of School Profits?

By
Jason Bedrick

Should there be a separation of school and profit? Many opponents of education reform seem to think so.

Case in point, a blog post at the Washington Post yesterday decried “outside forces that want to make big profits on the backs of our nation’s most vulnerable children.” Setting aside that the vast majority of private schools are nonprofit, the author apparently misses the fact that parents choose to send their kids to these schools. (Does it make sense to complain that other businesses are profiting “on the backs” of their paying customers?) In order to persuade parents to switch to private schools, they must offer parents something that the free-to-attend government schools do not. Even when a school choice program covers the full cost of private school tuition, the parents would merely be financially indifferent. To motivate parents to choose something other than the default government school option, private schools still must offer something better.

Moreover, it is absurd to think that profit—in the sense of financial gain—is limited only to the for-profit sector. Do teachers, principals, and other school staff from janitors to bus drivers “profit” from their salaries or wages? What of the profits made by the corporations that publish the textbooks that students read? Or construct school buildings? Or manufacture desks, whiteboards, pens, pencils, and playgrounds? Whether government- or privately-run, nearly every adult involved in the formal education process is earning a “profit” short of the parents who volunteer to chaperone the high school dance.

Those who denounce “profits” in education simply don’t understand the role of profits in a market. Perhaps they are confused because in the government-run education system with which they are familiar, there is little connection between financial gain and meeting the needs of students. In a competitive market, by contrast, profits (and, just as importantly, losses) provide valuable information. As explained in Herbert Walberg and Joseph Bast’s excellent book, Education and Capitalism: How Overcoming Our Fear of Markets and Economics Can Improve America’s Schools (which is celebrating its 10th anniversary):

In a capitalist economy, profits are the reward earned by firms that maximize the quality of services and goods, minimize overhead and bureaucracy, motivate their workers to achieve high and consistent levels of productivity, and avoid unnecessary expenditures. Successful firms sell better, cheaper, or better and cheaper products and services than do other firms. Customers notice, and business gradually shifts from inefficient to efficient firms. […]

Low-performing government schools don’t gradually lose customers and face the threat of closure, the way an inefficiently run business does. As a result, there is little urgency for reform. Their assets do not move from the control of those who have misused them into the hands of others who could do a better job. (Pages 98-9)

In our existing education system, only the financially well-off can afford to live in the expensive districts with high-performing government schools or to pay for private schooling. Without school choice programs, low-income families are locked out of these markets. Instead, their only option is the local, assigned, government school. If I blogged for WaPo, I might say that these underperforming schools are built on “the backs of our nation’s most vulnerable children.”

Topics: 
Education and Child Policy

Cato’s “Deepbills” Project Advances Government Transparency

By
Jim Harper

It’s not the culmination–that will come soon–but a major step in our work to improve government transparency has been achieved. I’ll be announcing and extolling it Wednesday at the House Administration Committee’s Legislative Data and Transparency conference. Here’s a quick survey of what we’ve been doing and the results we see on the near horizon.

After president Obama’s election in 2008, we recognized transparency as a bipartisan and pan-ideological goal at an event entitled: “Just Give Us the Data.” Widespread agreement and cooperation on transparency has held. But by the mid-point of the president’s first term, the deep-running change most people expected was not materializing, and it still has not. So I began working more assiduously on what transparency is and what delivers it.

In “Publication Practices for Transparent Government” (Sept. 2011), I articulated ways the government should deliver information so that it can be absorbed by the public through the intermediary of web sites, apps, information services, and so on. We graded the quality of government data publication in the aptly named November 2012 paper: “Grading the Government’s Data Publication Practices.”

But there’s no sense in sitting around waiting for things to improve. Given the incentives, transparency is something that we will have to force on government. We won’t receive it like a gift.

So with software we acquired and modified for the purpose, we’ve been adding data to the bills in Congress, making it possible to learn automatically more of what they do. The bills published by the Government Printing Office have data about who introduced them and the committees to which they were referred. We are adding data that reflects:

- What agencies and bureaus the bills in Congress affect;

- What laws the bills in Congress effect: by popular name, U.S. Code section, Statutes at Large citation, and more;

- What budget authorities bills include, the amount of this proposed spending, its purpose, and the fiscal year(s).

We are capturing proposed new bureaus and programs, proposed new sections of existing law, and other subtleties in legislation. Our “Deepbills” project is documented at cato.org/resources/data.

This data can tell a more complete story of what is happening in Congress. Given the right Web site, app, or information service, you will be able to tell who proposed to spend your taxpayer dollars and in what amounts. You’ll be able to tell how your member of Congress and senators voted on each one. You might even find out about votes you care about before they happen!

Having introduced ourselves to the community in March, we’re beginning to help disseminate legislative information and data on Wikipedia.

The uses of the data are limited only by the imagination of the people building things with it. The data will make it easier to draw links between campaign contributions and legislative activity, for example. People will be able to automatically monitor ALL the bills that affect laws or agencies they are interested in. The behavior of legislators will be more clear to more people. Knowing what happens in Washington will be less the province of an exclusive club of lobbyists and congressional staff.

In no sense will this work make the government entirely transparent, but by adding data sets to what’s available about government deliberations, management and results, we’re multiplying the stories that the data can tell and beginning to lift the fog that allows Washington, D.C. to work the way it does–or, more accurately, to fail the way it does.

At this point, data curator Molly Bohmer and Cato interns Michelle Newby and Ryan Mosely have marked up 75% of the bills introduced in Congress so far. As we fine-tune our processes, we expect essentially to stay current with Congress, making timely public oversight of government easier.

This is not the culmination of the work. We now require people to build things with the data–the Web sites, apps, and information services that can deliver transparency to your door. I’ll be promoting our work at Wednesday’s conference and in various forums over the coming weeks and months. Watch for government transparency to improve when coders get a hold of the data and build the tools and toys that deliver this information to the public in accessible ways.

Topics: 
Government and Politics, Telecom, Internet & Information Policy

Tesla and the Red-State Blues

By
Roger Pilon

In red-state America, the free market is king, right? Progressivism, socialism, the nanny state – those are fightin’ words. And what state could be redder than Texas? Well perhaps it’s still true that liquor’s for drinking and water’s for fighting in Texas, but water isn’t the only thing some Texans think worth fighting for. Legally-protected – read “unfree” – markets are another.

It seems that the folks who make these new-fangled electric cars – Tesla Motors, in particular – have a different sales and service model than traditional manufactures have had since the days of the Model T. As CNN Money explains, under the conventional model, manufacturers

sell cars to independently owned and operated dealers or distributors who, in turn, sell them to the public, usually after some negotiation over the final price.

By contrast, Tesla’s showrooms, of which there are already 37 around the country, are owned and operated by Tesla Motors. Most of the showrooms are in shopping malls with only enough cars kept in inventory for display and for test drives. Also, there’s no haggling. Every Tesla car sells at full sticker price. Service on the cars is performed at separate garages, also owned by Tesla.

Now I hold no brief for these cars or that sales and service model. In fact, I rather like my gas-guzzler, to say nothing of haggling. But I also like the free market, and that’s precisely what Bill Wolters, president of the Texas Automobile Dealers Association, seems not to like. If Tesla chief executive Elon Musk “wants to have a showroom in a mall, that’s fine,” Wolters said, “but he can’t own it.” Fearing that the Tesla sales and service model might encourage other automakers to try it, Wolters is fighting to keep in place the Texas law that prohibits automaker-owned dealerships. Under that law, Tesla can’t sell cars in Texas.

Tesla has showrooms there, but employees can only show off and explain the car. They can’t give test drives or take orders. They can’t mention the price at all, even if customers ask. The current law doesn’t stop anyone in Texas from ordering a Tesla Model S online if they want to. Tesla just can’t deliver it to the customer. The buyer has to arrange for delivery through a third-party shipping company.

And if you think Texas is bad, in North Carolina – another traditionally red state, despite the close presidential race in 2012 – dealers are pressing for a law that would make it illegal even to sell cars online in the state, something that’s currently legal in all 50 states.

We’ve seen this movie before, of course, with occupational licensure, consumer products, and so much more. And invariably it comes down to the same thing: the folks in place don’t like competition from the new kids on the block, so they run to the legislature for protection. Come on Texas (and North Carolina), practice what you preach. You’re making the blue states look good, and no self-respecting Texan wants that.

Topics: 
Political Philosophy, Regulatory Studies

I Hate to Say “I Told You So” II (Web Wiretap Edition)

By
Julian Sanchez

I wrote recently in Wired about the many problems with an FBI proposal to require Internet providers to render their services more wiretap-friendly. Perhaps chief among these is the deleterious effect such a mandate would have on cybersecurity.

This is so, first, because it would tend to push companies away from design choices that make a system more resilient or secure but harder to intercept. If you risk massive fines when you can’t cough up user communications, that’s a powerful incentive to prefer server-side over end-to-end encryption, centralized routing over peer-to-peer, and closed over open standards and source code. Second, as 20 renowned computer scientists and security experts also pointed out in a letter released last Friday [PDF], the surveillance interface companies create to comply with orders can itself become an attractive “attack surface” subject to exploitation. The primary concern there, of course, is that lawful intercept code can be hijacked by a third party to enable their own surveillance—but it can also be a source of information about government investigations for hackers in the service of foreign powers.

Lo and behold, The Washington Post reports today that a successful 2010 hack against Google, believed to have originated in China, also compromised a sensitive database of information on accounts that had been flagged for national security surveillance. That’s a boon to any foreign government looking to discover which agents have had their covers blown and which remain undetected—and something worth throwing considerable hacking resources at. It’s not clear whether the attackers were also able to use any internal law enforcement interface to assist them in targeting the accounts of Chinese dissidents, which is the part of the attack that had been previously reported.

Defenders of the FBI proposal tend to pooh-pooh security concerns raised about requirisng such backdoors: Our brilliant American programmers, they assert, will find ways to enable wiretapping without creating new vulnerabilities. But if a company like Google, with its massive financial resources and a stable of some of the smartest coders anywhere, can be victimized in this way, how realistic is it to expect thousands of Internet startups to achieve better security?

Topics: 
Telecom, Internet & Information Policy

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