An Apple a Day Keeps the Tax Man at Bay

Apple has always been known as a leader in innovation. They have quite literally changed the everyday lives of most Americans with inventions like the iPod, which revolutionized the music industry; the iPhone, which did the same for cell phones; and the iPad, which created a product that most people never knew they needed and made it a staple consumer good. Over the course of several years they have gone from gee-whiz luxuries to how-the-heck-did-we-live-without-these devices. But now, they are under attack for a different type of innovation – finding out clever ways to avoid paying taxes.

One of the ingenious schemes involved setting up a holding company in Ireland that maintains its bank accounts on U.S. shores. Because the Unites States’ tax code bases residency on where the company is incorporated, whereas Ireland assesses residency based on where they are controlled (Apple keeps its bank accounts and records in the U.S.), Apples becomes a ghost, effectively existing nowhere for the purposes of taxation.

Apple’s tax avoidance strategies led Congressional investigators to drag it to Capitol Hill to answer for its crimes perfectly legal system of tax shelters, a fact not lost on Sen. Rand Paul.

“Tell me one of these politicians up here that doesn’t minimize their taxes,” Paul chided. “Tell me a chief financial officer that you would hire if he didn’t try to minimize your taxes legally. . . I am offended by a government that uses the IRS to bully groups such as the Tea Party but I am also offended by a government that convenes a hearing to bully one of America’s success stories.”

Bingo. The problem isn’t Apple. The problem is the tax code; namely, that it is so rife with loopholes, credits, deductions, incongruities and unnecessary complexities that it practically begs to be gamed.

And yet, if Apple is indicative of a problem, its core philosophy can also lead us toward a solution: simplicity. “[Steve Jobs] truly believed that simplicity was a virtue,” says Jobs’ biographer Walter Isaacson. Perhaps that’s why the statement, “Simplicity is the ultimate sophistication,” was perched prominently atop the brochure for the Apple II personal computer.

But simplicity is far from simple, a seeming contradiction explained by Jonathan Ive, who leads the design team for Apple.

“Designing and developing anything of consequence is incredibly challenging,” says Ive. “Our goal is to try to bring a calm and simplicity to what are incredibly complex problems so that you’re not aware really of the solution, you’re not aware of how hard the problem was that was eventually solved.”

Much the same thought process must be applied to tax reform. It is inevitably a difficult task, infinitely more complex than the “broaden the base, lower the rates” mantra that exists on the tip of every tax reformists’ tongue. Many companies, whose lobbyists have successfully negotiated a favorable break in the current system will argue against change. Journalists and wonks will search for every so-called “winner” and “loser” in the change. And Democrats will inevitably attempt to shift the conversation away from fundamental reform to a ploy to raise revenues.

It will be difficult. But it is necessary. As Robert Samuelson writes in the Washington Post:

 

“Hardly anyone denies that [the tax code] is a complex mess. In 2010 calculating their taxes cost Americans $168 billion, estimates the Taxpayer Advocate Service of the Internal Revenue Service. That’s about 15 percent of taxes collected – a heavy overhead. Almost 60 percent of taxpayers pay accountants or other tax preparers. Public esteem for the tax system is low; in a 2011 Pew poll, 55 percent judged it unfair. Disaffection was fairly even politically: 47 percent among Republicans, 58 percent among Democrats and 56 percent among independents.”

Most crucially, the current tax system is hurting American businesses in the global economy. A survey of 10,000 graduates of Harvard Business School founded that the U.S. tax code was named the biggest drawback to doing business compared to other countries.

There is no better time for tax reform than now as it can supply a much-needed bump to economic growth, without the need for further stimulus or deeper deficits. And who knows, it may also lead companies like Apple to spend more time and money figuring out how to perfect their products, not their tax avoidance strategies.