Capital Strike, Part Deux: Can Obama Negotiate?
Apple Operations International, in the Hollyhill Industrial Estate,
one of the Irish subsidiaries employing 4 percent of Apple’s global
work force and purportedly earning 65 percent of its worldwide income
As I reported in this blog December 9 (“U.S. multinationals pursue victory in Capital strike against taxes”), nominally U.S. multinationals are refusing to bring back to the United States nearly $2 trillion in self-defined “overseas earnings,” as long as they must pay the 35 percent tax on the earnings. Faced with a similar situation in 2004, President George W. Bush arranged “repatriation” of nearly $400 billion at a tax rate of only five percent, based on a kiss and a promise to use the money to create American jobs. New York Times investigative reporter David Kocieniewski later found the action had “led to no discernible increase in American investment or hiring. On the contrary, some of the companies that brought back the most money laid off thousands of workers. A study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses.”[i]
In a standoff, there has been no repatriation since that time.
But on May 22, one of the still-ongoing tax strike leaders, Apple CEO Tim Cook testified before the Senate Permanent Committee on Negotiations, headed by liberal Democrat Carl Levin of Michigan. Word was that Cook would propose a “dramatic simplification” of corporate tax laws. In a promise reminiscent of 2004, he would “present specific proposals aimed at encouraging companies to bring back foreign earnings to the United States and invest that money in job creation, as well as research and development.”[ii]
Cook had been roasted in advance of the hearing for Apple’s use of a web of offshore entities — some with no employees or physical offices — that allow it to pay little or no taxes on tens of billions of dollars, according to a Senate investigation. Most of Apple’s profits actually derive from research at its Cupertino, California headquarters, rather than from low-wage manufacturing operations. In 1980, however, it signed over to Irish subsidiaries the right to declare profit from that research. Between 2009 and 2012 alone, Apple shielded at least $74 billion in profits from U.S. tax laws by setting up subsidiaries in Ireland.[iii] Press and Senate critics have singled out to two Irish shell companies, one of which brought Apple $30 billion between 2009 and 2012, but paid no taxes to any government. The other paid a tax rate of 0.05 percent in 2011 on $22 billion in earnings.[iv]
“Apple sought the Holy Grail of tax avoidance,” said Sen. Carl Levin (D-Mich.), chairman of the committee, before the hearing opened. “It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.” Even John McCain of Arizona, the senior Republican on the committee, noted that Apple is “among America’s largest tax avoiders. (The arrangement) “gives significant advantage compared to smaller companies.”
“What impresses me is the effortlessness of Apple’s international planning,” added Edward Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Congressional Joint Tax Committee. “It’s as if Apple checked a box to elect out of worldwide taxation on a vast swath of their international income.” [v]
During the hearing, however, Cook’s low-key demeanor, his mere willingness to testify, while other CEO’s demurred – and the great popularity in the U.S. of Apple’s products – totally disarmed the committee. Cook won a hands-down victory over Congressional “investigators.”
Apple, he testified, pays “all the taxes we owe — every single dollar.” Apple is simply “a victim of an outdated tax system. Unfortunately, the tax code has not kept up with the digital age.”
Missouri Democratic Senator Claire McCaskill was convinced: “I love Apple” she testified. “I harassed my husband until he converted to a MacBook. It’s a huge part of my life.” Not to be outdone, pre-hearing attack dog Levin added that, “We love the iPhone and the iPad… I know it’s not easy to come in front of a spotlight but it’s important for us.”
During the hearing, Senator John McCain also thanked Cook for his testimony: “You have to be a pretty smart guy and a pretty tough guy, too, and I say that in a complimentary way,” he beamed.
Sen. Rand Paul (R-Ky.), who had not wavered, got right to the Libertarian point, saying the committee owed Apple an apology for “dragging” Cook and other Apple executives to Washington when they had not done anything illegal. He proposed lowering the corporate tax rate from thirty-five to five percent to encourage companies to bring operations back to the United States – exactly what President Bush had achieved nine years earlier.
Even Cook himself was a bit more generous: “To incent a huge number of companies” to bring back money, he testified, the new rate “would have to be a single-digit number.”
With Congressional leaders seemingly fleeing the fight, and with President Obama’s last election behind him, the game may now be on. Given the duration and solidarity of the capital strike, it’s clear that the final tax rate – unlike yours or mine – will be negotiated. George Bush and Rand Paul’s five percent plan is the floor, and the ceiling is probably in the 20s.
It will be up to Obama, initially, to negotiate a deal that could repatriate enough wealth, in the pockets of ordinary taxpayers , to provide a significant boost in employment and a second stimulus to the economy. During his election campaign, he lambasted his opponent for dodging taxes through use of overseas tax shelters.
Many in labor, the left, or just ordinary taxpayers might wish Rich Trumka would handle this negotiation. But we are stuck with Obama. Apple computer, at least, with $10s of billions parked overseas, was recently forced to borrow $30 billion to pay dividends to stockholders. But we will need to mount one more campaign to raise the money that now sits in overseas banks, when the taxes payable could hire back tens of thousands of teachers and long-unemployed working people.
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