Ayn Rand, Atlas Shrugged
Life is not a Randian novel, populated by characters embodying absolute good or absolute evil. Life is more complicated than that. Real life actors strut upon the stage wearing hues of gray instead of black or white. But that doesn’t mean that life can’t teach moral lessons.
Last month, real life rather than fictional characters taught some important lessons about the nature of money.
When Tim Cook, CEO of Apple Inc., testified before the Senate Permanent Subcommittee on Investigations, he had reason to feel secure and proud. By any measure, Apple is one of the great business success stories of the 21st century. Since 1997, when the late Steve Jobs returned from exile to resume leadership of the Company, annual revenue has grown from $7 billion to $156 billion. Company profitability has risen from $1 billion in the red to $42 billion in the black.
Apple has achieved success the old-fashioned way: by creating a string of technologically superior and aesthetically impressive products, including the iMac, the iBook, the iPod, and the iPhone. Apple has done more than fill existing needs. It has created new markets … and then filled them. The iPad created and filled a niche between the smartphone and the laptop computer. Apple revolutionized the music business when it launched its iTunes Music Store in 2003, making songs available for download for 99 cents. There were two million downloads in the first 16 days. By 2010, ten billion songs had been downloaded; by early 2013, 25 billion.
Along the way, Apple became the largest corporate taxpayer in the United States, paying over $6 billion in 2012, and expecting to pay about $7 billion this year. In 2012, one out of every 40 dollars paid to the U.S. Treasury in corporate income tax was paid by Apple.
But Apple does not pay more in taxes than it has to. Apple receives more than 60% of its revenue from overseas operations. Not surprisingly, Apple pursues tax strategies that enable it to recognize income in jurisdictions with low tax rates. The United States has one of the highest corporate tax rates in the world, at 35%. So where it can, Apple avoids repatriating its overseas income.
Apple does nothing covert or illegal. During the hearing, leaders of both parties conceded that the Company had broken no laws. But they nonetheless expressed outrage at Apple for doing what taxpayers at every bracket do: paying the minimum amount they legally can.
In reaching that view, the senators ignored the obvious fact that all taxpayers — including businesses large and small, and individuals rich and humble — tend to follow the same strategy when they can. Senators Carl Levin and John McCain, the ranking Democrat and Republican on the Committee, come from Arizona and Michigan, two states which advertise aggressively, trying to lure businesses away from other more heavily taxed states to their friendlier tax climes. Neither suggested that in urging companies to avoid high tax rates, their home states were guilty of contributing to the delinquency of a taxpayer. On the contrary, Senators Levin and McCain probably hope that dozens of companies will do exactly what Apple does: move their money where it is taxed the least.
Of course, tax avoidance is not a limited to corporations. Tiger Woods moved from California to Florida so he could legally pay less taxes. Nor is tax avoidance limited to millionaires. California, despite its high tax rates on income, actually undercuts neighboring Oregon on liquor taxes. So the first business one sees driving south on I-5 from Oregon into California is All Star Liquors, where ordinary Oregonians drive to stock up on alcoholic beverages. Most people would call these cross-state shoppers smart and thrifty. So far, no one has suggested convening a special committee to investigate their tax avoidance schemes.
Local governments that own and operate airports servicing international flights also encourage tax avoidance by offering duty-free shops, where travelers are incentivized to buy luxury goods by the lure of avoiding taxes.
But the inconsistency of U.S. senators in castigating a successful private corporation for doing what millions of regular citizens and thousands of businesses do everyday — often with the blessing of government– was more than matched by their hypocrisy.
Senators themselves are happy to take advantage of the tax code. Disregard the many benefits they receive for “free” – meaning that taxpayers pay for them – such as travel allowances and franking privileges. Most also receive support from organizations formed under Section 527 of the Internal Revenue Code, which grants tax-exempt status to political committees at the national, state, and local level. These groups, operating on both sides of the political spectrum, actively influence elections and policy debates, though they must stop short of advocating the election or defeat of candidates. On the Left, they include EMILY’s List and the American Federation of Teachers. On the Right, they include the Club for Growth and the National Rifle Association. These organizations do not pay low taxes, as Apple was accused of doing. They pay no taxes. Yet no member on the Senate Permanent Subcommittee on Investigation proposed to eliminate this benefit.
The most disturbing feature of the Apple inquisition, however, was not its double-standard or its hypocrisy. It was the Committee’s view of why tax avoidance is bad. By paying less in taxes, Senators Levin and McCain both asserted again and again, Apple was forcing everyone else to pay more. As Senator McCain put it: “The general American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes.” In other words, the government’s entitlement is absolute. If it does not receive its due from one, it must take it from others.
Now most people understand that the amount they spend must relate to the amount they earn. If they take in less, they need to figure out a way to spend less. But that basic idea, apparently, is beyond the ken of the U.S. Senate. To its leaders – on both sides of the aisle – the amount the government wishes to spend is somehow sacrosanct. So if some taxpayers legally pay less than expected or wished by the government, the other taxpayers must pay more to, in Senator McCain’s phrase, “make up the balance.”
This notion transcends hypocrisy. This notion is bad. For it’s based on the troubling notion that all private wealth belongs to the government. It pits citizen against citizen, since the success of one in avoiding taxes means the punishment of the others, who must “make up the balance.”
If the Senate hearing exposed the good and bad of money, the burgeoning career of Anthony Weiner, which was the subject of a New York Times story at the same time Apple’s tax strategy was in the news, revealed the ugly.
For those who forget — and who wouldn’t want to? — Anthony Weiner is the semi-adolescent ex-congressman who took pictures of his namesake appendage and emailed them to women, who were no doubt thrilled to be so favored. Now in some societies, this kind of behavior might pose an impediment to a future business career. But in our mixed economy there are different routes to success. One may be called the Apple way, and it consists of providing high quality products at reasonable prices. Consumers buy these products because they better their lives. Another route to success may be called the Weiner way. It consists of using one’s connections and access to political power to advance the interests of those willing and able to pay well for such services.
Weiner has gone to work trading on his contacts. He has been hired to persuade the Federal Communications Commission to relax its long-standing objections to major foreign investment in the broadcast industry. His qualification? His knowledge of the key players and their political sensitivities, knowledge acquired from his tenure on the House Energy and Commerce Committee. Weiner has also approached federal officials at the Energy and Agriculture Departments, as well as members of Congress, on behalf of his clients.
Weiner, who had previously never worked in the private sector, now marvels at his “success” in business. “I found I am pretty good at it,” he told the Times, adding that he “didn’t have to do very much or work very hard to drum up business.”
“Things kind of came over the transom,” he explained. Imagine that!
Weiner actually believes that his privately acquired acumen, rather than his publicly financed rolodex, is responsible for his success. In his perspective, there is no difference between the way he earns money and the way Apple does. “I’m a good capitalist,” he told the Times, revealing his profound ignorance of capitalism.
The members of the Senate Permanent Subcommittee on Investigations are not Weiners. Senator McCain, in particular, is an honorable man and an authentic American hero who has served his country nobly. But one has to wonder about their understanding of the nature of money. Like Weiner, most have lived their adult lives on government pay checks. Those with substantial wealth likely inherited it (like Senator Rockefeller) or married into it (like Senator McCain). They spend a great deal of time studying how to tax it, but few have personal experience in how to create it.
Not all money is created equal. There is money honestly earned, through productive labor and ingenuity. And there is money made by pull. In the latter case, nothing of value is produced in exchange. One hopes that our political leaders understand the differences. But the handling of the Apple inquisition gives little cause for optimism.