Do tech giants really need a tax holiday?

October 25, 2011

By Kevin Kelleher
The views expressed are his own.

I want a new MacBook Pro. And I’d really love to buy one. But Apple won’t let me.

It’s not that I can’t afford it – the cash is just sitting there in my account. And it’s not that I don’t want Apple to have the money. I’d love to do my share to create jobs at One Infinite Loop or to reward Apple shareholders for their faith in the company’s impressive profit growth. No, Apple won’t let me buy a Macbook Pro because it expects me to pay $2,500. And I simply don’t want to pay that much, so I’m asking Apple to lower the price. And they should accept that; after all, $500 is better than $0.

I even went into an Apple store and asked the blue-shirted genius who greeted me if Apple would part with a 17-inch Macbook Pro for $500. He looked at me like I was crazy. Which is pretty much what I expected, but I figured I had a shot. Because I was simply following the example set by Apple and other big-cap, cash-rich tech giants who have done an end-run around tax laws. If Apple can ask for a tax holiday to bring its overseas profits home, why can’t I ask for a Macbook holiday so I can bring a new laptop home?

The genius was probably right. It is silly to insist that you pay less than your fair share. But that’s not stopping Apple, Google, Cisco, Microsoft, Oracle, EMC Adobe, Qualcomm and other companies and trade groups from lobbying hard for a tax holiday. Corporations in the biotech and energy sectors are also on the bandwagon, but the strongest push is coming from Silicon Valley.

U.S.-based multinationals hold an estimated $1.4 trillion in profits in overseas accounts. Apple alone has $82 billion in cash and marketable securities, two thirds of it held in offshore accounts. Google has $43 billion in cash and marketable securities while Microsoft has $57 billion, Cisco $46 billion and Oracle $32 billion. Many of these companies have expressed an interest in bringing overseas cash to the U.S., except they think the tax rate is too high.

The corporate tax rate in the United States is 35%, which on the face of it is higher than most industrialized countries, but the rate averages out once tax breaks and loopholes are factored in. Even so, by employing complex strategies like the Double Irish and the Dutch Sandwich, companies like Google shuttle profits through different countries like a pea in a shell game, so that they pay even lower rates and save billions of dollars on taxes.

But there’s a catch. Much of that money languishes in overseas accounts. To bring it home, many tech companies like Cisco have called openly for a tax holiday. Others, like Apple and Google, have made their voice heard through groups like WIN America, which employ 160 lobbyists to agitate for a brief amnesty when companies can bring that overseas money home and pay a tax rate closer to 5%.

It sounds simple enough – bring a trillion dollars back into the U.S. economy and hire millions of workers! – but it relies on a kind of magical thinking that corporate managers are smart enough to see through. Spending money doesn’t create much demand. And companies only invest in jobs when the demand for their goods or services is on the rise. As long as consumers aren’t spending, companies won’t use much of that money for new hires.

Instead it’s likely to go elsewhere, most likely to shareholders. Some will go to dividends, but tech companies with high profit growth rates (like Google’s 30% or Apple’s 85%) won’t pay them. Instead, companies will spend tens of billions buying back their shares to help shore up their stock prices. That doesn’t lead to new rank-and-file jobs, but it does enrich corporate executives paid in stock and options packages.

As many commentators have pointed out, the last U.S. tax holiday, in 2004, often went to companies that didn’t add net jobs in the following years, but in fact cut them. Much of the repatriated money went to – surprise! – shareholders. Which suggests that having a second tax holiday only seven years later could create a kind of moral hazard, paradoxically encouraging companies to stash even more future profits overseas in hopes of a third tax holiday down the road.

The desire to avoid taxes is understandable. But it’s getting to the point where many of these tech companies are so tax-averse they’ve lost perspective. If the point is to bring back money to support the U.S. economy, then why not take, say, half of that trillion dollars and invest it philanthropically as private money in public causes: Improving schools to educate future workers, or improving the infrastructure on which commerce depends, or stabilizing local economies where many of their customers shop?

If companies feel unprepared to manage the complexity of overseeing such investments, they might consider outsourcing it to entities set up for just that purpose. These entities are called federal and state governments. Paying them in the form of taxes, contrary to the rhetoric of the tax-holiday supporters, also creates jobs. When a federal or state worker spends his or her income, it has the exact same impact on the economy as a private worker’s dollars.

Another factor complicating a tax holiday is the recent shift in the nation’s political climate. A year or so ago, when calls for a tax holiday began to grow louder, the Tea Party was on the rise, rallying for a smaller government and lower income taxes. In recent weeks, the Occupy Wall Street movement has emerged as a kind of counterbalance. It’s more likely to protest a huge corporate tax break that will primarily benefit shareholders – and vilify the tech giants who receive them.

Success in Silicon Valley has never been measured purely in terms of dollars. It’s also about having a positive impact on the world. Which is why it seems hypocritical for these tech giants to withhold money from an economy that, if that money is judiciously spent, could benefit it considerably.

Repatriating their overseas profits and paying the standard tax rate may not be the ideal solution, but it’s more effective than handing it to shareholders, many of whom are overseas investors. And it’s certainly more productive than keeping it moused away in overseas accounts.

It’s time for Apple, Google, Cisco and the rest of Silicon Valley’s leaders to act like corporate leaders: Bite the bullet and pay your taxes like everyone else.

PHOTO: San Jose skyline, Silicon Valley, via Wikimedia Commons.


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Instead of asking companies to “pay their fair share” why not lobby for Congress to change the law. This is totally within their power to fix, it just lies outside their will to do.

You can’t expect a company to pay for something they are not legally required to.

Posted by StefanTS | Report as abusive

The question is, how much tax revenue will we collect if we don’t give a tax holiday. One can argue that we would collect more with a tax holiday than we will without.

Posted by jjw120 | Report as abusive

The State Department should get onto this! It’s high time for some international negotiation and agreement, and if necessary, arm-twisting; to remove the prospect of hard-working economies bleeding more cash into idle “tax havens”. Is there any other long-term solution, apart from worldwide harmonisation of tax policies?

Posted by matthewslyman | Report as abusive

Business are designed to earn profit. Customers are where the cash is. So its our job to pay up. IF an analogy is required, we are the golden goose. Or the Cash Cow (TM). That is all there is to it.
The Cows have limited cash – after all, they can only makes so much. Therefore, credit card was invented – so we can sell the future to buy more. When credit cards swelled up too much, mortgage is created – mortgage the house to buy more. When mortgage swelled up too much, derivatives was created – so we can mortgage more than we worth, to buy more.
If you are a farmer, it is common sense that you have to feed the cows so that they can make milk for you. If you refuse to feed it, sooner or later it will die, and you can no longer milk it.
Problem is, common sense does not exist on Wall Street. The Cash Cows (TM) are dying. And they keep on milking to the last drop. Those with common sense would, for their own profit, just like the farmer, feed the cows first, to milk it latter. But there are those who prefer to butcher the cows, take the profit, and enjoy – after all, why not? Unlike the farmers, the Big Bosses made enough doughs for hundreds of lifetime together – enough for him, his children, his grand children, grand grand children, and all of their bastards.
Now, the Cash Cows (TM) are incredibly confused, and rightly so. Livestock are meant to be stupid, and they should be. After all, who in the right mind would happily support and encourage the butchered, until their last moment, to be butchered? Unfortunately some of the Cash Cows (TM) got smart. But they got isolated, marginalized, and attacked by the rest of the Cash Cows (TM) who are so depended on the Farmers to be fed.

Posted by hereiam2005 | Report as abusive