Apple’s Appearance before the Senate Clarifies the Need for Comprehensive Tax Reform

May 22, 2013

In a hearing where Senator Carl Levin (D-MI) deemed Apple’s tax planning “the Holy Grail of tax avoidance,” Apple CEO Tim Cook’s appearance before the Senate Permanent Subcommittee on Investigations resulted in a show trial of sorts. But instead of revelations about Apple’s tax structure, much of the attention focused on the need to reform the outdated and broken U.S. corporate tax code.

"Apple welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy," Cook said in his opening remarks.

Though no one has questioned the legality of Apple’s business operations, Senator Levin said the hearing would be used to “highlight” Apple’s gimmicks and tax avoidance strategies. Instead, it served to highlight the impossible intricacies of the current tax code.

Senator John McCain (R-AZ) presented the notion that Apple knowingly violated the spirit, if not the letter of the law through its tax planning strategy, through which it greatly limited its international tax liability. But Cook flatly denied any wrong doing.

"We not only comply with the laws, but we comply with the spirit of the laws," Cook said.

The corporate tax code is such that only CPA’s and employees of corporate tax departments can understand it, and is better suited to lawyer and accountants than economists.

Tim Cook took the opportunity show support for simplification of the corporate tax code and present Apple’s principles for tax reform:

1. Revenue neutrality

2. Eliminate all corporate tax expenditures

3. Lower corporate income tax rates

4. Implement a reasonable tax on foreign earnings that allows free movement of capital back to the U.S.

The first two principles, though important in theory, are set with a false premise. Revenue neutrality is good, but it should be calculated on a dynamic basis, with considerations for economic growth; corporate tax expenditures include both loopholes and cost recovery – only the loopholes should go, not the deductions for capital reinvestment and other business expenses. It’s Apple’s final two principles to reform that are most crucial.

As Senator Rand Paul (R-KY) said in the hearing: “Money goes where it’s welcome. Currently, our tax code makes money not welcome in this country.”

Our current code restricts the free flow of capital back to the United States in two ways: a high corporate rate and worldwide system of taxation.

Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out. A high corporate tax rate is destructive to economic growth, and leads to fewer jobs and less corporate tax revenues.

The world’s highest tax rate coupled with our worldwide system of taxation serves to further damage the economy. The worldwide system locks $1.7 trillion outside of the U.S. that American companies want to bring home to reinvest. This discourages the free flow of capital. In the hearing yesterday Senator Levin helped make this point without realizing it when he asked Cook if he had plans to bring back any of the more than $100 billion Apple has in holdings abroad.

"I have no current plan to bring them back, at the current tax rate,” Cook responded.

Tax codes shouldn’t control business decisions, but Cook's response shows that the current code does.

Instead, taxes should raise the necessary revenue with the least economic harm. But our current corporate tax code damages economic growth and threatens long term prosperity in the United States, and raises meager revenues in the process.

Comprehensive tax reform should simplify the code, lower the rate, and move us to a territorial system. This would unlock capital, allow businesses make decisions based on business factors, and promote economic growth, leading to more jobs, higher wages and stronger economy.

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