Shocker: Governments Compete
Apple CEO, Tim Cook, wore a tie the other day for his Senate grilling about the taxes paid — or rather not paid – by his company. Following the lead of former Apple CEO, Steve Jobs, Cook prefers open neck shirts, fashionable in his home court – Silicon Valley — but not that day as this was a road game for him. Senators Carl Levin (D. MI) and John McCain (R. AZ) also wore ties, as these are part of the home uniform for the backyard rotisseries known as Senate hearings.
The Senate Permanent Subcommittee on Investigations wanted to “hear” about Apple’s use of an Irish subsidiary to avoid the payment of $9 billion in US taxes in 2012. “Hear” is not really the right word as there is very little hearing at a hearing. The witness is there – usually against his will and sometimes thanks to a subpoena – to serve as a prop for self-promoting elected officials.
To be clear, the hearing was not about tax evasion. Evasion happens when you break the law. The hearing was about tax avoidance. Avoidance happens when you comply with the law to your advantage. The former sends you to jail while the latter delights your shareholders.
Instead of all the pontificating about “fully contributing,” “Holy Grails of Tax Avoidance” and other sound bite magnets, the hearings might have done well to focus on the unpleasant truth (for governments but not for taxpayers) that governments compete.
Ireland ran its country into the mother of all ditches during the financial crisis. Few did worse though Iceland comes to mind. Now it needs to rebuild its economy by attracting job-creating companies. Since it received no tax revenue from most multinationals, there would be no cost to Ireland if it created a favorable tax environment for them in exchange for some number of jobs.
The Irish plan relied (as to American companies) on the widely criticized US corporate tax code that combines extremely high marginal rates with a swarm of subterfuges to get around paying them. This is not new news and our Congress has allegedly been working on the problem for some years now. In theory, lowering the rates and getting rid of the loopholes would solve the American revenue-loss problem, perhaps at minimal cost if the rates were wisely chosen. It might even cause repatriation of overseas money for job-creating investment.
Imagine a simple corporate tax law with marginal rates that were consistent with those in other countries. There would be little incentive to game the system and, apart from legions of lawyers and accountants, who game the system for a living, and a few thousand Irish Apple employees, who might be working elsewhere or not at all, where are the losers in that trade?
The hidden losers are the ones conducting the hearings. Our imaginary simple corporate tax code has a fatal flaw. There are no loopholes to sell for campaign contributions.
In essence, the desire for campaign contributions leads to a desire for loopholes to sell, which leads to the need for high rates if any money is to be raised at all, which leads clever Irish politicians who have their backs to the wall to create a few thousand Irish jobs at no cost to themselves.
We might learn something at Congressional hearings if the home court advantage were diminished only slightly. Divide them in halves like football or basketball.
In the first half, the elected officials would sit at the dais wagging their fingers at the unwilling witnesses below, just as we do now.
In the second half, the roles would be reversed and Tim Cook would sit at the dais and grill Carl Levin and John McCain about the rightness or wrongness of complying with the very laws they and their colleagues had sold to the highest bidders.
Meanwhile, chalk up a win for Ireland.