It Doesn’t Matter Whether It’s Actually Illegal. In Fact, It’s Actually Worse Because It’s Probably Legal.

A Senate investigation has revealed that between 2009 and 2012, Apple avoided paying taxes on $44 billion in profits that it earned offshore.

Where the corporation did pay taxes on its offshore earnings, it paid at a much reduced rate. Taking advantage of low corporate tax rates in Ireland, it made that country the base–at least for tax purposes–of some of its vast international operations. But, Ireland’s corporation-friendly 12% tax rate wasn’t low enough. So Apple used its leverage to arrange a special tax deal in Ireland and pays just 2% on the profits that it earns through Apple Sales International.

But that’s just proverbial the tip of Apple’s tax avoidance iceberg.

It turns out that Apple Operations International, which has accounted for more than 30% of the company’s total profits—an estimated $30 billion between 2009 and 2012–does not have a tax status in any nation. So, the billions of dollars in profits which that entity produces have somehow gone completely tax free.

As close as investigators have been able to determine, in 2011, a particularly profitable year, Apple paid about $10 million in taxes on net international earnings of about $22 billion.

Apple’s North American operations are based in the U.S. and subject to U.S. tax laws. In a prelude to testimony before the Senate Permanent Subcommittee on Investigations, Apple claimed that in 2012 it paid $6 billion in U.S. taxes. In actuality, however, it paid $2.4 billion in taxes. The other $3.6 billion is “deferred taxation,” money that it will pay on revenues earned outside the U.S. by its North American operations if it chooses to bring those monies back into the country. If it does not choose to do so, the taxes do not need to be paid, ever.

So, in 2012, when the corporation did not have enough revenue on hand in its North American operations to cover the generous dividends owed to shareholders and to complete a strategic stock buy-back, it chose to sell $17 billion in bonds, rather than to draw on the estimated $100 billion in cash reserves that it has overseas.

What, then, do we take away from all of these statistics:

(1) Although small businesses in the U.S. may very well be caught in a tax vise, anyone who argues that American corporations are over-taxed is uninformed at best and deliberately duplicitous at worst. The nominal tax rates imposed on corporations are not anywhere close to the actual taxes that they pay. (Another often-cited example has been General Electric, which pays such low actual taxes that, when it received subsidies for investing in “green” energy technologies, the federal government owed it a substantial tax refund.)

(2) A 2010 study indicated that the top 1% of Americans in terms of income owned 35% of all stock, and the next 9% owned another 45.8%. That means that just 19.2% of stock is owned by the other 90% of Americans. So Apple’s profits are benefitting a very small percentage of Americans, and the taxes that it and other corporations are avoiding are being paid directly or indirectly by that other 90% of Americans.

By indirect taxation, I mean that when public services are cut to reduce almost non-existent corporate tax burdens, “average” taxpayers have to make up for those reductions out of their own pockets. Total revenue requirements very seldom go down at any level. So, sometimes it is a matter of revenue requirements being shifted from the federal to the state level or from the state to the local level. In other instances, individuals have to make up the difference out of pocket. For instance, each time that I receive a bill for water and garbage pick-up, there is a box in which I can indicate a contribution to support the maintenance of our city parks.

There has been a direct analogy in higher education. As state governments have reduced their subsidies to public colleges and universities, the out-of-pocket costs for students and the amount of debt carried by those students into their later lives has risen dramatically.

Indeed, a parallel consideration, which is seldom calculated, involves the amount of indirect salary reduction that American workers have absorbed because of the great reduction in the benefits now paid by most American corporations. Pensions, health insurance, dental insurance, and disability insurance are being paid out of pocket by an ever-increasing percentage of American workers, if they can afford those “benefits” at all.

(3) The argument frequently made by corporations such as Apple is that their exploitation of cheap foreign labor is necessitated by American consumers’ demand for inexpensive goods. But what has gone largely unsaid is that labor costs are such a small factor in corporate costs and equal such a small percentage of corporate profits that even a substantial increase in labor costs would not dramatically or proportionately reduce profits.

Another analogy is available in our increasingly corporatized universities–in the small percentage of university revenues that is typically allocated to faculty salaries in benefits. Most students, most parents, most legislators—and most faculty—might be surprised to know that faculty salaries and benefits typically account for between 20% and 25% of university budgets, including everyone from chaired professors to adjunct faculty. So the common belief that tuition is rising dramatically because of ever more exorbitant faculty salaries and benefits, and especially because of the inflated salaries and benefits paid to over-privileged tenured faculty, is a talking point that is very difficult to substantiate. At the average university, tenured faculty are well-paid only in comparison to underpaid non-tenure-eligible but full-time instructors and lecturers and to terribly exploited adjunct faculty—and not in comparison to administrators.

To return the focus to corporations, although putting the squeeze on workers’ wages and benefits will certainly increase profit margins, it is not a necessity to be profitable. Corporations have made a choice to value stockholders’ dividends over workers’ wages, benefits, and working conditions, and it is no accident that the unprecedented escalation in the compensation of those in upper-management has been tied directly to stock performance.

Thus, we have what Harold Meyerson has recently termed an “upside-down economy,” in which stock prices and corporate compensation are soaring well beyond historic benchmarks, but sales are falling in conjunction with average salaries as an increasing percentage of the workforce is being hired on an underpaid, contingent basis.

Again, an analogy is available in our universities, in which a president may receive $500,000 in annual compensation, which might be five to seven times what the average tenured faculty member receives, but might be 200 to 250 times what the average adjunct faculty member makes per course.

(4) It is not a coincidence that those political figures most determined to focus on the fact that 47% of Americans pay no federal income tax, even though they may pay 25% of their limited incomes in other taxes, are the very politicians who are most determined to focus on the oppressiveness of the nominal corporate tax rate, even though very few corporations pay anything close to that rate.

Given that these same political figures have been the most persistent proponents of “tax reform,” one must realize that as skewed as the present tax system is, any “reform” of that system is very likely to make it only more skewed.

When he died, Steve Jobs was widely eulogized as one of the most important figures of the “American century.” But “important” is not the same as “admirable.” As much as one might appreciate the impact of Apple products on our daily lives, it is not hard to argue that those innovations have come at a considerable—and, at this point, perhaps largely incalculable—cost.

5 thoughts on “It Doesn’t Matter Whether It’s Actually Illegal. In Fact, It’s Actually Worse Because It’s Probably Legal.

  1. It is true that international corporations frequently pay far less taxes than the nominal rates. It doesn’t follow that corporations are under-taxed.

    The nominal rates in the US are among the highest in the world (around 39%, if memory serves). Apple, GE, and other companies leave money overseas to avoid high taxes. Ireland has a 12.5% corporate tax rate. If the US reduced the corporate tax rate (and made other changes, such as eliminating exclusions and switching to a territorial system), Apple would have much less incentive to leave money overseas. Note that in 2010 the 20 most profitable US companies paid an average of 25% income tax, led by ExxonMobil’s 45%.

    Taxes on corporate profits are always born by someone. A corporation pay for taxes out of profits (for instance, if competition doesn’t allow raising prices) which reduces the stockholders value, or it may raise prices (e.g., if the same tax falls on all companies in that market), which means the tax is passed on to customers, or some some combination. The point is that corporate taxes are really born by stockholders or customers.

    So—going through your points:
    (1) “Arguing that American corporations are over-taxed is uninformed … or duplicitous.” No, there is a valid argument about whether to collect taxes from corporations or another source. It is valid to discuss the best way to collect revenue. Also, the combination of high nominal rates and loopholes results in rational actors doing inefficient things to minimize taxes. Neither point is uninformed or duplicitous.

    (2) Correct, corporate profits disproportionately benefit richer Americans. Still, US Census Bureau statistics show that about half of all families own stock directly or indirectly. (http://www.census.gov/compendia/statab/cats/banking_finance_insurance/stocks_and_bonds_equity_ownership.html). Since family income tends to increase with age, someone who doesn’t own stock at 25 may well own stock at 55. Studies show that overall we have a progressive tax system, with the top percentile paying a larger share of total taxes than their share of total income. Yeah, changing corporate tax structures might need a corresponding change to personal tax rates to maintain parity.

    (3) “A substantial increase in labor costs would not dramatically … reduce profits.” What? That’s a strong claim that needs strong backing. Walmart pays about $7 billion in tax (32% of profit) and has around 1.4 million employees. Figuring a median wage of $22k and adding 15% for payroll taxes and healthcare (a guess), that means Walmart pays at least $35 billion in wages in the US. A substantial increase in wages would materially affect profits for Walmart. Undoubtedly there are examples going the other way, but the point is that claiming that wages can be substantially increased with dramatically reducing profits is not backed up and counter examples are easily found.

    (4) “Any ‘reform’ [of the tax] system is very likely to make it only more skewed.” Your opinion. Maybe Congress will surprise us all and do something rational with taxes. We might disagree on whether corporate taxes should be lower or higher, but perhaps we can agree that a rational system would have fewer loopholes and exceptions, so that the same rates apply to everyone. We might also agree (maybe?) that US corporations compete globally, so a rational system would not penalize US corporations or operations within the US.

    Finally, I agree with you that Steve Jobs is not a particularly admirable person. I will quibble about Apple’s innovations having “come at a considerable–and … incalculable–cost.” What on earth does that mean? Is this anti-Apple? Anti-innovation? Anti-corporate? Or what?

    • Your response to my third point is the least persuasive. See one of my earlier posts: https://academeblog.org/2012/11/23/five-basic-reasons-to-support-actions-by-walmart-workers/

      The concentration of wealth in the U.S. is now more extreme than it was during the Gilded Age. Profitability does not have to come at the expense of a living wage. Right-wing politicians like to use the 1950s as a cultural, social, and ideological reference point. But they ignore the period’s very high corporate and individual tax rates, the dramatic rise in the standard of living of working Americans, and the high rate of unionization among American workers. Certainly the prosperity of the period was due to the relative lack of international competition, especially in manufacturing, due to the devastation caused by the World War, and so it is not replicable today. But I see very little evidence that the historically high concentration of wealth and historically high corporate profits.are justifiable when the average worker is being asked to do much more with less.

      • Corporate profits have indeed been high recently, compared to the last 50 or 60 years. You make a claim that corporations can afford to substantially increase wages without reducing profits. Noting that corporate profits are high is not proof. For instance, let’s look at Procter & Gamble. Last year P&G reported $83.7 billion in revenue, $12.8 billion in income before taxes, $3.5 billion in taxes, and 130,000 employees. Today P&G has a market cap of $216 billion. They don’t break out wages but let’s suppose $100,000 each, including payroll taxes, health, and retirement. That’s $13 billion, which is more than income before taxes. You’re asserting that P&G could *substantially* increase wages *without* dramatically reducing profits. What’s “substantial”? 10%? That would reduce P&G after tax profits from $9.3 to $8.0 billion, or 14%. To me, that’s a substantial reduction (how would you respond to a 14% pay cut?) and this calculation is for one of America’s best run and most profitable companies. Other companies that are more labor intensive would likely find a “substantial” increase in wages would be a bigger share of profits. And some companies lose money. Would you have them lose more? So I will continue to disagree that wages could be raised at minor cost.

        More generally, wages are set by the market and constrained by competition. Why would P&G raise wages above the going rate? Surely they worry about competition. Unless every company in the world raises wages, a company that arbitrarily raises wages above market rates will be at a competitive disadvantage. And if everyone raises wages, why wouldn’t everyone pass on those increased wages in the form of higher prices? What about colleges? TAs notoriously get paid hardly anything–should your school share some of its excess profits by increasing wages of TAs and wage employees?

        The real source of overall wage increases is productivity. Without productivity gains, you can shift costs around but you can’t make a country better off overall. Productivity gains come in part from capital, which comes in part from profits.

        Regarding the 1950’s high corporate and individual tax rates, very few people paid the highest individual rates in the 1950’s and the total tax percentage (total tax over total income) increased steadily through most of the twentieth century. The 1950’s were a time of high top rates but low(er) average rates.

        In what way is “the average worker is being asked to do much more with less”? Certainly wages have stagnated; what’s the evidence for “do much more”? I work the same hours as a generation ago but am more productive, in part because I’m smarter and more experienced (I hope) and in part due to investments in technology.

        Don’t get me wrong–I would like to see wages go up and I think that corporations should be plowing more profits into R&D, capital investments, and staff development. Make labor more valuable and wages will increase.

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