At the State of the Union address just four months ago, President Obama sang the praises of Apple, a company that is consummately American — from its logo to its fashion-driven product line. Chief Executive Officer Tim Cook sat proudly in Michelle Obama’s box as the president announced that for the first time in years, Mac computers would be built in America.
Last week Cook found himself in a box of a very different sort. With candor and patience that put his inquisitors off stride, he endured hours of grilling before the Senate Investigations Subcommittee. Carl Levin, the panel’s chairman, described Apple’s behavior as “gimmickry” and accused them of pursuing “the holy grail of tax avoidance.” Within the fickle confines of Washington, David Bowie got it right: “We can be heroes just for one day.”
At issue was the company’s corporate structure and the effective tax rate that resulted from it. No one argued that Apple had done anything illegal or broken any rules. Levin simply felt that the company should pay more. Ironically, he was the only senator in the room who held office when Apple established its existing corporate structure back in 1980. And as one of the three lonely votes against the 1986 tax bill that set the foundation of today’s system, he surely understands as well as anyone that many companies seek to limit their tax exposure while carefully complying with the laws as written.
As a multinational company, Apple sells products and earns profits in dozens of countries. The US government, unlike most others, attempts to collect taxes on all of those profits, not just those earned in the United States. Given that America’s corporate tax rate remains the highest in the industrialized world, bringing money home from overseas results in a big tax bite. That’s something most American firms avoid like . . . a 35 percent tax rate.
Cook was quick to admit that his company’s ownership structure was complicated. The firm’s European subsidiaries distribute profits to a holding company in Ireland, where the corporate tax rate is 12.5 percent. As a result, Apple holds over $100 billion in Ireland that, the CEO says, “isn’t coming back” anytime soon. For Apple shareholders, avoiding a $35 billion tax payment probably sounds like a great business decision. For some members of Congress, not so much.
Making the case for his company’s decisions, Cook came off far better than the average witness on Capitol Hill. Perhaps it’s easier to be blunt when you employ 60,000 workers in the United States, but lines like “we pay all the taxes we owe — every single dollar” set the tone from the start. In public and private sector alike, a defensive posture makes people think you have something to hide. Cook’s confidence contrasted dramatically with IRS managers pleading the Fifth before Congress the very next day.
By refusing to feel guilty about the results produced by a 30-year-old corporate structure, Cook placed the responsibility for the taxes Apple pays where it belongs: on the US Congress. And Congress, being Congress, took the bait. Amid hearings of the House tax-writing committee he leads, Representative David Camp bluntly declared, “The tax code is a mess.” John McCain observed that the Apple situation “reflects a flawed corporate tax system.” Levin closed his own hearing by saying, “It’s unfair. It needs to change.”
But therein lies the rub. Cook, like Camp, believes that tax reform should lead to lower rates, a simpler system, and reduced penalties for moving international profits back home. Levin, like President Obama, would use any reform to punish companies that have offshore operations (which includes Apple and just about every multinational company you can name).
Driving these two distinct viewpoints even farther apart is Obama’s demand that tax reform be used to raise more revenues. Unfortunately, US corporate tax collections, like the 35 percent rate, already exceed most of our global competitors. At a level of 2.6 percent of GDP, America’s business taxes exceed those of Ireland (2.3 percent), Germany (1.7 percent), and, yes, even France (2.5 percent). For all the rhetoric, it’s eminently clear that tax reform is far easier said than done.
Senator Levin and his staff believe that it is wrong for companies and individuals to engage in behavior that avoids taxes. They hoped that calling out Cook might generate support for legislation that targets companies like Apple. Instead, they mostly provided a lesson in the complex, convoluted, and often uncompetitive nature of America’s corporate tax code. They also provided a reminder that those responsible for the mess were asking the questions, not sitting at the witness table.