What does Apple really owe taxpayers? A lot, actually.
Even as Apple sizzles in the Senate hot seat for alleged tax evasion and finds itself the object of a Justice Department investigation into price-fixing e-books, the company still enjoys a vast reservoir of good faith with the American people. But if Apple doesn’t reexamine its relationship to those who made its success possible, that well could one day run dry.
Apple is not unique in its attraction to the game of monopoly and tax dodging, but it sure is creative. The firm has helped to pioneer the exploitation of loopholes and the setting up of subsidiaries where profits are stashed offshore through a fantastically complex maneuver known as the “Double Irish with a Dutch Sandwich” which seems to involve, among other things, a mysterious Irish company with no employees. The upshot? Apple pays only 2 percent of its $74 billion in overseas income in taxes. According to Senator Carl Levin, that translates to ducking $1 million an hour. Surely Apple qualifies for the tax avoidance Olympics.
During a recent Senate hearing, CEO Tim Cook spun Apple’s tax stance as a model of corporate stewardship, explaining that the firm had a duty to shareholders to pay as little as possible. Many senators agreed, including Rand Paul, who offered that the committee should “apologize” for forcing Apple to sit through a “show trial” concerning “a bizarre and Byzantine tax code.”
Few would defend the U.S. tax code as fair. But what about Cook’s notion of his responsibility to shareholders? Economist and business historian William Lazonick at the University of Massachusetts Lowell has studied the emergence of the idea that companies have a duty, first and foremost, to maximize profits for shareholders — a line that allows executives to argue that doing things like avoiding taxes is not only a good business practice, but a solemn duty.
According to Lazonick, this philosophy took off in the go-go ‘80s and is linked to the financialization of corporations that started in the ‘60s. In 1983, two financial economists, Eugene Fama of the University of Chicago and Michael Jensen of the University of Rochester, wrote two papers promoting the idea that corporate executives should focus their attention on maximizing returns to shareholders because they are the ones who make the investments and take the risks. Jensen landed a job at Harvard Business School in 1985 and, as Lazonick writes, “soon shareholder value ideology became the mantra of thousands of MBA students who were unleashed on the corporate world.”
Many have come to believe that maximizing shareholder value is actually a legal requirement, but as Vanderbilt law professor Margaret Blair explained to Congress in 2008, that is almost never true. The shareholder value ideology is nothing more than a trend, and perhaps a very bad one.
One of the problems with the Fama/Jensen argument is that shareholders are not the only stakeholders in companies who invest and take risks. Employees do this. So do taxpayers. Just look at the case of Apple.
During his Senate grilling, Cook said, “the most important objective at Apple will always be creating the most innovative products.” That sounds good, but Cook seems to have forgotten that it was the taxpayers, through the U.S. government, who funded many of the key innovations that makes Apple’s products possible. The iPhone would not be the iPhone without touch screen technology. The fact that you can use your phone to guide a mountain hike with GPS, ask for a quick weather-check from your voice-activated personal assistant, and even access the Internet, are all examples of the magic that happens when the government takes risks and spends money to drive innovation that eventually helps companies like Apple flourish.
Economist Mariana Mazzucato has noted that executives of companies like Apple enjoy boasting about their entrepreneurial muscle, but if you look closely, you see that they have actually “surfed the wave of U.S. government-funded investments.” Siri, for example, started out as a twinkle in the eye of government officials who envisioned software that could help overloaded military commanders. In 2003, the Defense Department’s investment arm, DARPA, chose the nonprofit research institute SRI International to lead a gigantic, five-year push to build a virtual assistant that ultimately provided the inspiration for Siri. The Defense Department’s $150 million financial support made it possible for artificial intelligence experts to work together on a mission likely far too risky for most corporations. Apple, which bought Siri in 2010, has reaped the benefits of that taxpayer-funded research.
That’s not all. Mazzucato points out that in its early stages, Apple enjoyed funding from the U.S. government’s Small Business Investment Company program — well before the venture capitalists came on the scene. Later, once the company found its footing, Apple was under constant siege from rivals. Where does Apple turn when it wants to guard patents against competitors? The U.S. court system, of course. Where does it look for favorable international trade agreements? To government agencies, naturally. Then there’s the infrastructure and networks — things like electricity grids and public highways — that allow Apple devices to find their way to customers and do all those things that make us marvel. And you can’t forget the public schools and universities that educate Apple’s workers, including many of its executives, like Cook, who went to Auburn.
Taking advantage of all this taxpayer largesse without giving much back is what some might call a free ride. Taxpayers have invested a lot in Apple. Maybe it’s time for Apple to “think different” about returning the favor. Otherwise, a lot of Apple’s customers may start doubting the story that St. Patrick drove all the snakes out of Ireland.
PHOTO: Apple CEO Tim Cook testifies at a Senate homeland security and governmental affairs investigations subcommittee hearing on offshore profit shifting and the U.S. tax code, on Capitol Hill in Washington, May 21, 2013. REUTERS/Jason Reed