The latest witch hunt du jour is courtesy of the Senate Democrats. They hauled Apple CEO Tim Cook before a committee to inquire about Apple’s legal tax avoidance practices. The Senate brought in professors and other “smart set” types to basically highlight what we all know: our tax code is broken and, as a result, companies can employ strategies to minimize their tax liability.
Nobody has done more to cover the vastness of Apple’s offshore cash hoard than Zero Hedge (here, for example). The cash hoard is a target for the United States, especially after several years of trillion-dollar deficits.
First, it should be noted that Apple paid $6 billion in taxes to the federal government in 2012. That’s an awful lot of money — and it’s nearly 2.5% of all of the U.S. government’s corporate tax haul for 2012. But some in the Senate on both sides of the aisle (gee, thanks Senator McCain) think Apple should pay more.
I suppose the statist argument is, “Why should Apple get away with avoiding to pay taxes on much of its offshore income? It’s not fair.”
Here’s the thing that many people may (conveniently) forget: what Apple is doing is not only completely legal — Apple is actually required to do it.
Senator Rand Paul alluded to this when he basically took Senator Carl Levin and the rest of the Senate Committee to the woodshed for even bring Apple before the Senate for testimony:
Tell me one of these politicians up here that doesn’t minimize their taxes. Tell me a chief financial officer that you would hire if he didn’t try to minimize your taxes legally. Tell me what Apple has done that is illegal.
Senator Paul is 100% right. Legal minimization of tax liability is akin to shopping for a good price on a new computer. Why pay more than you have to? The Tax Code contains deductions and has ways to legally avoid paying taxes (so-called “loopholes”). Why would anyone in their right mind pay more than they have to, especially to a government that blatantly wastes billions every year? This is especially true for corporations and executives, who work for their shareholders.
As a reminder, a corporation is owned by its shareholders. Corporate executives owe a duty of loyalty to the shareholders. This basically means that executives have a fiduciary duty to always act in the best interests of the shareholders. Not the employees. Not the federal government and its thug-like tax collectors. Not the consumers. Just the shareholders.
A fiduciary duty to the shareholders requires executives to treat their companies — and profits — with the utmost care and diligence. In other words, if the executives know of a legal strategy to reduce tax liability, the executives should employ the strategy, thus keeping more of the company’s money for stock buybacks, dividends, capital investment, etc. Apple is obligated to treat its revenue as if it belongs to the shareholders of Apple – because it does.
Interestingly, it could be argued that today’s low interest rate environment is another reason why Apple keeps its money offshore. There’s no need for Apple to bring its money home to be taxed and then paid out as dividends to investors because it can simply borrow money to finance dividends. Here’s yet another unintended consequence of the Federal Reserve’s money printing euphemistically referred to as “Quantitative Easing.”
Senator Paul also suggested that the U.S. pass a simple law permitting a window for the repatriation of cash held overseas at a low tax rate and putting the proceeds into an infrastructure fund. Jim Pethokoukis, among others, has also suggested this as a way to encourage corporations to bring cash hoards home for use here in the United States. After all, money goes to where it is treated best. Why not treat it best in the United States of America?
Frankly, I think it’s a great idea and I hope that Congress holds the administration’s feet to the fire on this. A savvy GOP could turn the repatriation idea into a corporate-friendly debt-free “stimulus” plan where the windfall actually goes to infrastructure. What’s not to love?
The great Judge Learned Hand once said the following in the case of Gregory v. Helvering:
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
Judge Hand was a Democrat. Today’s Randian anti-hero Democrats could learn a thing or two from the esteemed Judge Hand.
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