Of Course Apple Avoids Billions in Taxes—and It Should

The big reveal here is two-fold: The U.S. corporate tax code is an impossible dream (we knew that, already); and Apple is acting like a sensible corporation (we knew that, too).

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Reuters

There are a few ways to respond to the congressional report that Apple has discovered ingenious ways to avoid paying taxes on income earned overseas.

  • There is the outraged response: "Apple's scheming to avoid paying taxes is unethical and unpatriotic."
  • There is the proactive response: "The U.S. corporate tax system is broken, and we should fix it."
  • And there is the indifferent response: "Wow, a multinational company is legally saving money. What color is the blue sky, again?"

A year ago, I would have told you I fall between outraged and proactive. I'm trending rapidly toward indifferent.

'A Bad Boy'
Apple is a multinational company, with 61 percent of its revenue from foreign operations. To (legally) minimize its tax bill, Apple has set up empty subsidiaries in lower-tax countries like Ireland, effectively making them a quasi-stateless corporation with an effective corporate tax rate of about 20 percent.

This might sound devious and and a little bit evil. But we aren't accusing Apple of behaving like a criminal. We are accusing them of behaving like corporation, since it is in the nature of corporations to find ways to save money. Rather than a story about patriotic duty, or funding the social net, or corporate ethics, this is really a story about unrealistic expectations. We wish we could tax American companies on their earnings from all around the world. And we can't. We just can't.

Apple is an American company, in most people's eyes. But it is a global company, insofar as most of its employees and most of its revenue come from outside the country. Since most developed foreign economies have lower statutory rates -- and because there are ways to play national tax laws off each other to further cut taxes -- multinational companies like GE and Google have mastered the global tax labyrinth to save money. Congress operates under the illusion that it can impose U.S. taxes on foreign earnings, but trying to fit a global mesh of far-flung money under Washington's narrow tax purview will always end like all efforts to push toothpaste back into a tube: Messily, somewhat embarrassingly, and thoroughly unsuccessfully.

"The most important takeaway for me from this report how ridiculous the US corporate tax system is," said Gary Hufbauer, an international tax policy expert at the Peterson Institute for International Economics. "We have this illusion of taxing earnings abroad. We think we should be taxing Apple and GM on any income earned anywhere in the world. But we can't, and very few countries even try."

"I would hope this turns out to be a great teaching lesson on how dysfunctional the architecture of our tax system is," he continued. "But it's more likely that we'll learn an easier lesson: That Apple is being a bad boy."

'The Worst of All Possible Worlds'
Tax experts I spoke with called the US corporate tax code "the worst of all possible worlds": a high tax rate, loopholes upon loopholes, billions of dollars falling through the cracks, and trillions stowed away overseas to avoid repatriation.

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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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