The world looked on agog as Apple Inc chief executive Tim Cook said his company had paid all the taxes it owed — seeming to say that it paid all the taxes it should have paid.
There is, of course, a big difference between the two.
It is no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the US Supreme Court seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction did not endow corporations with a sense of moral responsibility.
Apple, like Google Inc, has benefited enormously from what the US and other Western governments provide: highly educated workers trained in government-supported universities. The basic research on which their products rest was paid for by taxpayer-supported developments — including the Internet, without which they could not exist.
Their prosperity depends in part on the West’s legal system — including strong enforcement of intellectual-property rights.
Yes, they brought genius and organizational skills, for which they justly receive kudos. However, while Isaac Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders. Without public support, the wellspring from which future innovation and growth will come will dry up — not to say what will happen to our increasingly divided societies.
It is not even true that higher corporate tax rates would necessarily decrease investment. As Apple has shown, it can finance anything it wants to with debt. However, interest payments are tax deductible — which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment.
It is time the international community faced the reality: We have an unmanageable and unfair global tax regime.
It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today — with the US standing out in the forefront and the UK not far behind. It is the starving of the public sector which means the US is no longer the land of opportunity — with a child’s life prospects more dependent on the income and education of its parents than in other advanced countries.
These international corporations are the big beneficiaries of globalization — not the worker who has seen his income fully adjusted for inflation. Multinationals have learned how to exploit globalization in every sense of the term — including exploiting the tax loopholes that allow them to evade their global social responsibilities.
The US could not have a functioning corporate income tax system if it had elected to have a transfer price system (where firms “make up” the prices of goods and services that one part buys from another, allowing profits to be booked to one state or another).
As it is, Apple is evidently able to move profits around to avoid Californian state taxes. However, there is plenty of room to further fine-tune the system in response to the easier ability to shift profits around when a major source of the real “value-added” is intellectual property.
Some have suggested that while the sources of production are difficult to identify, the destination is less so; they suggest a destination-based system. However, such a system would not necessarily be fair — providing no revenues to the countries that have borne the costs of production. Yet, a destination system would clearly be better than the current one.
Even if the US were not rewarded for its global scientific contributions and the intellectual property built on them, at least the nation would be rewarded for its unbridled consumerism, which provides incentives for such innovation.
It would be beneficial if there could be an international agreement on the taxation of corporate profits. In the absence of such an agreement, any country that threatened to impose fair corporate taxes would be punished — production (and jobs) would be taken elsewhere. In some cases, countries can call their bluff. Others may feel the risk is too high. However, what cannot be escaped are customers.
The US by itself could go a long way to moving reform along: any firm selling goods there could be obliged to pay a tax on its global profits, at say a rate of 30 percent, but with a deduction for corporate taxes paid on profits in other jurisdictions. In other words, the US would set itself up as enforcing a global minimum tax regime. Some might opt out of selling in the US, but I doubt that many would.
The problem of multinational corporate tax avoidance is deeper, and requires more profound reform, including dealing with tax havens that shelter money for tax evaders and facilitate money laundering. There should be no room in tax systems for countries that are complicit in tax avoidance.
Why should taxpayers in Germany help bail out citizens in a country whose business model was based on tax avoidance and a race to the bottom?
To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system did not just come into being on its own. It was shaped from the start by lobbyists from large multinationals. If Apple and Google stand for the opportunities afforded by a globalization, their attitudes toward tax avoidance have made them emblematic of what can, and is, going wrong with that system.
Joseph Stiglitz is an economist and a professor at Columbia University.
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