Are Apple's Tax Games Bad for America?

The great global tax maze deprives the United States of revenue and jobs. But there's not much we can do to prevent it.

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Reuters

When Apple earns a dollar, it goes on the world's most famous tax-free vacation.

Let's take, for example, the first dollar from an iPhone sold in China. That buck flies to an Apple subsidiary in Ireland. From there, it'll take a round-trip to the Netherlands and back, this time to a second Irish subsidiary. Finally, the dollar will cross the Atlantic to land in a tropical island in the Caribbean, where it will reside, outside the glare of U.S. tax law, in the shade of a tax haven.

The Ireland-Netherlands-Ireland-Bermuda tour is a familiar globe trot for dollars of profit from major tech corporations. Google does it. Microsoft does it. GE does it. And, as New York Times reporters Charles Duhigg and David Kocieniewski explained this weekend, Apple does it with aplomb ($39 billion a quarter will buy you a decent team of tax accountants).

Never mind the insane and arcane details. The big picture is that the world's countries have built a great tax maze by competing to offer the most attractive rates to multinational companies, and the most sophisticated firms know how to navigate the labyrinth. It's not unlike a shopping pro using coupons, sales, and return policies to pay bottom price at competing electronic stores -- except at a much more complex and international level.

Without utilizing these tax shelters, Apple might have paid as much as $6 billion in federal taxes on its $34 billion in profits last year. With these tactics, Apple paid just over $3 billion. That's an effective federal income tax rate of 9 percent. Lower than Mitt Romney.

The reaction to the Times story has been fraught with indignation. But readers on every side of the federal tax debate ought to get used to this sort of thing. Yes, it's frustrating, and yes, it's morally debatable. But no matter what, U.S. multinationals are going to make most of their money overseas. No matter what, they're going to use (legal) overseas loopholes to hide their money from our relatively high corporate tax rate. And, no matter what, we're not going to see the vast majority of this money. And maybe we shouldn't. Apple is an American company, but it makes two-thirds of its money overseas and its Asian market is growing almost three times faster than the American market.

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The United States would like to tax income earned abroad by multinational companies. But let's face it: We don't. Either the Googles and Apples of the world hide their money where we can't touch it, or else they lobby Congress to create a tax holiday so that some of that money can return to the U.S. without paying a toll. Who wins in this system? Not the U.S. government, which is poorer for our efforts to have a high marginal tax rate that drives money out of the country. Not Apple and other multinationals, whose business plans are shaped by tax arcana rather than endogenous business strategies. And not Americans, who benefit neither from the tax money we don't see nor the domestic investments we don't get.

The great tax maze hurts Americans in various ways. Lower corporate income tax rates lure money to other countries (where, as in Ireland, they occasionally inflate bubbles). In the U.S., states make similar bids for companies, either by offering special tax breaks for specific companies or by doing away with income taxes, altogether. Nevada's corporate tax rate of zero lured a "handful of [Apple] employees" to man a Reno accounting office. That won't do much to help Nevada's unemployment rate, but it saves Apple hundreds of millions of dollars.

The bright side is that, even with some of America's largest companies paying mere pennies of every earned dollar to the federal government, this isn't the best place to focus on our national revenue crisis. Corporate income taxes account for less than 10% of  government revenue -- a quarter of payroll or federal income taxes. We can't prevent Apple and Google from shuttling their dollars around Europe and the Caribbean. But maybe if we acknowledged that international income is international and gave up trying to tax it at the world's highest marginal rate, we could focus the tax revenue debate where it belongs: on Americans earners.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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