Oh Look Over There! (Corporate Taxation)

US Tax Code

The hearing I wrote on yesterday with Apple’s Cook was met with quite an interesting reaction.  It also drew a Bloomberg article this morning, pointing out that tax avoidance is by no means an Apple-specific phenomena:

“Over the decades, Congress and governments around the world have allowed a system to develop which allows multinational companies to earn income tax-free by using contracts to shift the income, on paper, to companies in low-and zero-tax countries,” said Michael Durst, a retired international tax attorney based in Washington. The result “is eroding public confidence in the fairness of tax systems in the United States and around the world.”

Eroding?  Please.

The problem with what Apple (and Google, and Cisco, and pharma, and many other firms including GE) is doing is not that they’re moving things around “on paper” to legally avoid taxation.

It’s that they have effectively bribed Congress and the governments in other nations to make this possible while you and I cannot do anything similar.

Never mind that corporations pay taxes not on income but on net profits; that is, economic surplus.  You, on the other hand, pay taxes on income, and in the case of Social Security and Medicare you do so from the first dollar.

You do not pay on economic surplus, you pay on gross.

Yes, I’m aware of the so-called “deductions” and “exemptions” that allegedly provide at least some relief from this.  But there is no evidence that this effectively reduces taxation to that of being taxed only on surplus rather than gross earnings — and in fact for most people this is blatantly not true.

Now we could resolve that, were we to shift away from a tax code full of bribery payoffs, er, campaign contributions and lobbying.

That is, were we to shift to a pure consumption tax model such as The Fair Tax.

This would recognize that (1) taxing something already taxed is wrong, (2) all taxes are paid by people, and (3) economic innovation is best incentivized by removing special privileges that large, multinational corporations have garnered for themselves and which serve to stomp on the innovators — most of which are small entrepreneurial companies.  

Mr. Cook, strutting his stuff yesterday in The Senate with wild-eyed indignation, speaking deliberately slowly with emphasis on each syllable as if talking to down to someone of lesser intelligence, was wildly insulting.  Steve Jobs might have been able to pull that off but Cook’s attempt was a gross failure.

The problems do not begin and end with the tax code; that is just part of the problem.  Apple, along with most of the rest of the tech space, manufacture in China primarily to take advantage of wage and environmental arbitrage.  That is, they avoid laws that require the payment of minimum wages along with those regulating the disposal of industrial wasteby locating their manufacturing where such laws are either non-existent or not enforced.

This isn’t illegal but once again it points out that certain firms exploit their size and political power to obtain special privileges that nobody else gets.

Any claim that this is some sort of “success” story is awfully similar to claiming that your nation is “better” than another because it won an armed conflict not by superior guile and grit but rather through bribing the soldiers on the other side to not fight along with a 10:1 superiority in firepower.

We cannot “win” the innovation contest by granting some firms privileges that nobody else is able to attain.  Innovation comes from discovery, not regulatory arbitrage. The latter may produce alleged “profits” but those are illusory too; the “extra” profit is simply taking that which would, in a free market environment, wind up in the pocket of the employee or supplier and arrogating it to yourself by using the power of government to shove a gun up the employee’s or supplier’s nose.

Sorry folks, but that comes up no $ale here at The Ticker.

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Also, Senator Rand Paul had some things to say yesterday at the Apple hearing.  It’s worth a watch.