Apple Benefits Shareholders, Senate Democrats Cry Foul

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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.

Mike hails from New York City, where he practices law. He has an interest in advancing conservative and libertarian-leaning causes, which in his view have significant overlap. Mike spent his law school years in Texas, where he was instrumental in founding a chapter of the Republican National Lawyers Association. Mike has also served as the president of an international youth organization, where he was involved in lobbying American elected officials in support of various not-for-profit philanthropic causes.

15 Comments

  1. Andrew Young said:

    I find it very silly that Dems are so upset with Apple making millions and not paying their “fair share”. Does anybody remember the Congress lynch mobs with big oil companies during the gas price hikes in the final year of Bush? Yet, GE does the same thing for the past couple of years and crickets are even silent, why?
    If Apple, GE, Exxon, BP, or any other company that is making a profit and gaming the tax system legally, so what. I do the same thing on my taxes. Anybody who says, “I don’t try to pay the least amount possible” is lying.

    Good article Mike.

    • Mike said:

      Thanks! It’s ridiculous and just demonstrates our broken tax system. The repatriation holiday would be a smashing success, IMHO.

  2. Mike said:

    Just a quibble, but calling Apple’s cash a “hoard” implicitly feeds the narrative there is something sinister or wrong about Apple making a lot of money, and having a lot of cash in the bank. Progs have controlled the narrative so well, it’s hard not to fall into the trap of using their language.

    • Mike said:

      Ah, yes. That’s a fair point. Although, as an (unofficial, amateur, etc.) advocate for the shareholders of Apple, I would argue that when Apple doesn’t distribute its cash to the shareholders, it is indeed “hoarding” it! :-)

  3. Zombie John Gotti said:

    This is just another example of the blindness of our government to the spending problem we have. They look for someone to demonize and use that to shame them into ponying up. Instead, they should be finding ways to spend less or better use the revenues they already have.

    As for the infrastructure fund, I think it’s a great idea. However, you know as well as I do that it would be raided for use on whatever pet project someone could cook up. They could try to include wording in the enabling legislation to prevent it, but it would never make it into the final bill.

    • Mike said:

      Fair point. The statute would have to be crafted so as to prevent the funds from being used in ways not earmarked. But, since Obama demonstrated how impotent he was vis-a-vis the sequester, this shouldn’t be a problem, right?

  4. Lawful Plunder said:

    Just another in a long line of congressional dog-and-pony shows. I guess in Washington, it’s now a “scandal” if you’re not paying more in taxes than you legally owe. And it requires more than a little chutzpah to blames others for taking advantage of a tax code that congress wrote.

    But the Apple situation points up the need for tax reform; specifically the corporate tax should be zero. It’s inefficient/easy to manipulate and it’s “hidden” …not good characteristics of a tax.

    As for a tax “holiday” whereby companies could repatriate their foreign earnings… Nothing against it, but it doesn’t address the fundamental problem.

    • Mike said:

      I agree – if we have a corporate income tax and GE is paying zero, something is wrong. I’d prefer a lower tax rate with less deductions.

      Apple proves, once again, that the private sector is smarter than the public sector, and that legal tax avoidance will always be employed.

  5. G said:

    “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.”

    This may be off topic from Apple but had to share my personal experience to show how wacky our existing tax system is. Last year I made zero income, received 4000 back from the feds & 1000 state refund. I have put 2 kids through the #1 and #2 universities in the country on 100% fin. aid all grants zero loans including spending money and I live in a neighborhood that the average income is probably around 250,000. I drive a Mercedes. I would say my zip but well you know. I would say my CPA and I are “resourceful.”

  6. G said:

    Also should have included that one son is a sophmore and one just graduated so as to show I have done this for not just this last year but for around 6-7 years.

  7. Dave in Houston said:

    I still say McCain would have been better than Obama, although the difference would have been nugatory. Sad that was the best the GOP could come up with in 2008.

    Makes me think Apple is publicly being shook down for some private donations to some politicians favorite cause or charity.

  8. Mike said:

    Rand Paul’s comment was that we should cut them some slack as a large job creator, which is BS, and what I would expect to come out of Rand Paul most of the time.

    Personally I think some loopholes should be closed, but loophole is just a negative word for something that’s legal, with the connotation that it shouldn’t be legal.

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