TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Brian Levin on the concocted Apple tax controversy:

I’m angry because Apple not only engages in the questionable practice of stashing its cash in offshore tax havens, it has become the greatest offender, avoiding US taxes on $74 billion over the past four years. There’s something fundamentally wrong when the wealthiest company in America pays 12.6% in taxes, while my father’s small business, my grandfather’s store and the Korean Deli across the street pay a rate nearly three times higher. And it’s not just savvy accounting or a strategic maneuver—Apple’s tax avoidance has a profoundly damaging effect on our whole country.

(Via Marcelo Somers, who makes a nice response to this as well.)

There’s nothing “questionable” about Apple’s practices. U.S. corporations pay taxes on foreign income (income they earn for sales outside the U.S.) when that income is repatriated, or brought back into the U.S. If it stays outside the U.S., it isn’t taxed. That isn’t “questionable” or “abuse”—that’s how the system is designed. Is it any surprise that Apple, and nearly all companies, keep much of their foreign income outside the U.S. when repatriating it would mean facing a very large tax rate on it?

Minimizing the taxes you pay is neither morally nor legally wrong, or even “questionable.” It’s something we all do, because most people would like to pay only the amount of taxes they’re required to by law, and because it’s morally wrong to expect people to pay more than the law as designed demands. (And for anyone who feels bad for only paying what the tax code demands, feel free to give the Treasury donations. They accept them.)

Moreover, Apple doesn’t keep cash outside the U.S. simply to avoid taxes1; Apple requires capital to fund operations outside the U.S., such as building and operating new retail stores and purchasing capital equipment for manufacturing their products. But, of course, they do keep more cash outside the U.S. to avoid paying taxes on it, which means there is a distortion occurring due to our tax system’s structure—Apple, and most other multinational U.S. companies, avoid repatriating income to the U.S. due to a very high tax rate. This not only creates a more convoluted structure for corporations, but also limits potential investment in the U.S. by U.S. companies. This effect could be reduced by lowering the corporate tax rate or eliminating it altogether.

One other note: some have said that Apple’s done nothing wrong, and it’s the tax system that’s broken. That’s true, but what they seem to imply is that the federal government should simply force U.S. companies to pay corporate tax on all income, whether domestic or foreign, and be done with it. That isn’t precisely a desirable solution, however, since that would (1) encourage companies facing the full brunt of the top tax rate to move outside the U.S., since they have a responsibility to their shareholders; (2) encourage companies to take advantage of the rules to avoid such a high rate, and create more distorted operations and corporate structures as a result; and (3) if the tax system is effective across the entire economy, would then encourage Congress to do precisely what they’ve done all along, which is carve out breaks here and there for certain industries, and create an uneven mess of a tax system all over again.

1. Although they certainly could. Following the tax code’s rules to minimize your tax liability is not wrong, and it’s slightly disturbing to suggest otherwise. [↩]