Curious Capitalist

It’s Official: Tech Has Replaced Banking as the New Corporate Bad Guy

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JASON REED / Reuters

Apple CEO Tim Cook appears before 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, D.C., on May 21, 2013.

U.S. senators have accused Apple, the world’s most valuable company, of also being the world’s biggest tax avoider, as congressional investigators yesterday laid out how the technology giant has jumped through tax loophole after loophole in order to save some $44 billion of otherwise taxable income. Today they’ll follow up by grilling Apple CEO Tim Cook on Capitol Hill.

Aside from the fact that Apple clearly has amazing tax lawyers, what does all this mean? Here are the four key things you need to know:

1. Corporate tax reform will be the big issue in Washington now that the deficit is off the front burner. As I wrote in back in January, American firms have some $2 trillion in cash on their balance sheets stashed abroad, in large part because they don’t want to bring that money home and pay America’s 35% corporate tax rate. (Ireland, where Apple apparently stashed much of its cash, has a 12.5% rate — though it appears Apple was able to negotiate an even lower one than that.) With unemployment still high, and wages still flat, the government wants companies to bring that cash back to the U.S. and put it work creating jobs at home – and the investigation into Apple’s finances is clearly a warning shot to other major U.S. multinationals. Tax reform is coming, not just in the U.S., but also in other major developed countries (more about that below).

(MORESenate Panel Says Apple Uses Firms Outside the U.S. to Avoid Taxes)

2. Cash rich tech firms are replacing bankers as the new corporate bad guys. A year ago, I wrote a column called Learning To Hate Big Tech, which led with the investigation into Apple’s tax avoidance, but also laid out other Big Tech v. Government battles, like the push to get Amazon to pay local sales tax (which the government won) and the FTC’s anti-trust investigations into Google. The bottom line is that when you have a lot of cash and can move much of it abroad easily, as the biggest tech companies do, everyone is going to start paying closer attention to what you are doing. As I wrote at the time, “Steve Jobs was once quoted asking, ‘Why join the Navy if you can be a pirate?’ But when you are the most valuable company in the world, it’s harder to play the rebel.” The truth is that Big Tech is as corporate as it comes — and since Big Tech is also where most of the new growth and income creation in this country is right now, there’s little doubt that these companies will draw more and more attention from regulators, tax collectors, and social activists.

How well the industry defends itself may depend on how many new jobs it can account for. After coming under fire for outsourcing, Apple published a study showing that it had “created or supported” 514,000 U.S. jobs, far more than the 47,000 Americans currently on its payroll. The study’s methodology can be interpreted and spun many ways, but the bottom line is that this is going to become a more heated political issue in the years ahead. Technology has historically created more jobs than it has destroyed. But the periods in which the creative destruction happens aren’t pretty, and they tend to be characterized by high levels of inequality or social discontent — think Victorian England or the decades preceding the 1929 stock market crash in the U.S.

(MAGAZINE: The Trillion-Dollar Homecoming)

A number of academics, including folks at tech-friendly places like MIT and Stanford, believe we’re entering one of those periods. That’s why it will become crucial for Big Tech to prove that it’s enriching the 99% as well as the 0.001%. As the folks on Wall Street know, social issues can very quickly become just as important as your social network.”

3. Large government debts and shrinking public budgets means all rich countries will be looking more closely at corporate tax avoidance. At Davos in January, British Prime Minister David Cameron, whose country is leading the G8 at the moment, announced his desire to take on corporate tax avoiders internationally, telling multinational tax avoiders to “wake up and smell the coffee,” in a pointed reference to Starbucks, which recently “volunteered” to pay more tax in the U.K. in response to an investigation into its tax avoidance in Britain. And just yesterday, he announced he’d written to leaders in tax havens asking for their help with this initiative. Bottom line: All rich countries are looking to clamp down on multinational tax avoiders. Look for this to be a big topic at the G8 summit in a month.

4. The heat is being turned up high on major corporations to do their part. In an economically bifurcated world, where companies are flush but workers are not, and where the historic relationship between corporate profits and local economic growth has been broken, big companies are going to be under a lot more pressure to do more for the countries in which they operate. The push-back against tax avoiders like Apple is one example of this. Wal-Mart’s response to the garment factory fire and devastating factory collapse in Bangladesh recently is another;  as I noted recently, the U.S. retailer is now funding Bangladeshi government efforts to improve labor standards. The bottom line is that companies that have been flying 35,000 feet over the economic troubles of their headquarter nations or the countries in which they operate are going to be force to come back down to earth. Apple’s tax troubles are just the beginning of a very big fight between the world’s richest companies and its governments.

(MOREThe Next Big Thing In Corporate-Tax Avoidance)

17 comments
DonQuixotic
DonQuixotic

I'm pretty sure Banking are still corporate bad guys.

TomSavage
TomSavage

Ms. Foroohar seems to be conflating a couple of issues in key point no. 2. The implication is that Amazon was somehow avoiding paying taxes that it owed. Amazon was not pushed to pay local sales taxes. Amazon and other online retailers are being forced to collect taxes owed by their customers. There is no doubt that corporations lobby for favorable tax policies and then use them to pay as little tax as possible. We should never expect anything else from corporations or individuals. The best place to start is to reform the tax code. If we reduce the number of pages in the tax code from the tens of thousands to let's say 100 there would be a lot less tax avoidance (and fewer tax lawyers).

HudsonValleyTim
HudsonValleyTim

The disappearance of my job, along with virtually everyone else's at the Pfizer plant in Pearl River NY is a direct consequence of this type of corporate behavior. Guess where their manufacturing of the most profitable vaccine in the world (Prevnar), went? Yup, Ireland. So, I would have been happy if they had just shifted their profits overseas instead of my job, but it shows remarkable disregard for the welfare of your hometown either way. PaulDirks states that a corporation's firstresponsibility is to its shareholders. I contend that it should be to its stakeholders...including each person who helped build the success of the company. "Always dance with the one that brought you"

chippy1
chippy1

Apple-and those other corporations-shouldn't worry too much. All they have to do is wave their "A" list in front of those lawmakers, tell them about facing primaries in upcoming elections-NRA style, and the issue will be resolved in their favor. As a matter-of-fact, new tax loopholes will be made helping them out further.

forgottenlord
forgottenlord

I am biased: I am a software engineer working in Canada on a project developed in Microsoft's Visual Studio using C#/.NET and MS SQL - functional only on Windows machines (though designed to be usable on major browsers and tablets).  I hate Apple, but it's the hate of a Calgary Flames fan talking about how little grit the Edmonton Oilers have.

Regardless, I will never be able to hate tech companies the way I hate banks.

Tech companies build things.  The tablet is in the process of revolutionizing the world - soon most people will no longer own a computer and instead own a tablet, dropping their price range from 750-1500 down to 350-700.  It's less bulky, easier to use, fully portable and has more connection options than the computer or laptop equivalents.  Is it less powerful?  Sure.  But most people mainly need a computer at home for the Internet.  Apple did that - though they did it building upon the revolutions that Google and Microsoft (and their earlier selves) had each performed on the IT world - bringing computers mainstream, building the Internet and online tool bases, and just plain changing the world.  Throw in the cloud computing revolution that's just beginning to kick off, and the revolution is only beginning to change.

Additionally their products *enable* secondary businesses - like the one I work at.  My company produces education software and the product I work on is a tool for teachers that enables them to do more advanced assessment practices - ones they can't reasonably do without computing due to the sheer amount of calculations that would need to happen.  These products also do lots to change the world.  How many apps have you bought that weren't made by one of the big guys?  Tons.  Every website you go to - especially those with dynamic behaviors rather than static content - all of that is produced by people using tech company products.  Even in the midst of the great tech bubble bursting and the telecom crash and the outsourcing scandals, the total domestic employment in the IT industry has continued to climb year over year - a fact that is not true of most other fields.

Banks, however, don't build things.  There are some important things they do that are vital to the running of the economy and general health of consumers: home loans, investment loans, basic banking, checking and investment services, etc.  However, these are inherently limited businesses.  For banks to make the big bucks, they have to branch out and start doing things that make less and less sense - subprime, bond trading, large scale investment (which can only be done on progressively less structured systems) - until the vast majority of their profits come from things that look far more like pure casino bets (shorting, credit-default swaps, etc) and none of their stuff is so detached from the original loans that it really doesn't have any ability to facilitate economic development and general prosperity.  Then they take the winnings from that, pay it out in big bonuses, wait until they get unlucky and bill the government for their losses.  They've stopped being economic engines that enable building new things and become the worst example of unproductive greed in modern society.

ZacPetit
ZacPetit

"Big Tech" is just the scapegoat of the week. Every entity on the planet avoids taxes when it can. Large businesses are just better at it. The government can avoid this by simply lowering taxes.

smjhunt
smjhunt

@TomSavage It's no accident that Amazon resides in Washington State where this is no state income tax and very little business tax and from that advantageous perch has pushed out local businesses in the states where it sells who can't compete with their tax advantages including not collecting sales tax like the local business must do.  

Also, I don't see any impliciation in her article that Amazon or anyone else is not paying taxes it owes. It is rarely a case of a big business not paying taxes it owed but rather of them hiring lawyers and lobbyists to find ways to legally avoid taxes. In fact, it's not just the businesses that are responsible for this, but everyone who owns their stock.  Major stockholders would quickly push out any CEO out who paid more in taxes than they had to because that reduces the value of the stock.

Tax reform sounds like a great idea but it really is no panacea.  First, these companies are multinational.  If they don't like the tax code in one country they just move assets to another.   Even if you got the U.S. and Europe to sign a treaty to prevent this, they would just move their headquarters and assets to some small country like the Bahamas.  Secondly, unfortunately,Congress is controlled by special interests who offer a revolving door to congressmen providing them with cushy well paid jobs when they leave office in exchange for favorable treatment while they are in office so odds are that the new tax code will have plenty of loopholes in it.  In the 21st century we have basically come to a point where big businesses have more assets and capabilities than the governments and so in a sense are able to exist above the law.  Even fines no longer have any impact.  They are just considered the cost of doing business.

forgottenlord
forgottenlord

@HudsonValleyTim 

This is why corporations are not people.  Morality and responsibility are the domain of humans, not corporations.  Corporations have one job, one duty - to make money.  They are entities, detached from humanity.  To expect them to act morally is to expect animals to dance - it is fantasy born of idealism.  You can legislate or not, but you cannot expect them to behave in a way that is detached from their sole purpose.

forgottenlord
forgottenlord

BTW: this is not to say I'm not disgusted with this news.  It's a problem, it needs to be fixed.  All I'm saying is they will never replace banks as the corporate bad guy.

MrObvious
MrObvious

@forgottenlord 

I agree, tech and manufacturing invents and build things. Banks do not. In regards to taxes however they all work to minimize their liability and it's up to us citizens to make sure we have the political system that ensure fairness. The current system is a hot mess.

grape_crush
grape_crush

@ZacPetit > "Big Tech" is just the scapegoat of the week.

 Yes. And calling it the 'new corporate bad guy' is wrong as well. Last I heard, Apple and IBM weren't engaged in securities hijinks capable of crashing the global economy.

> The government can avoid this by simply lowering taxes.

Nope. Tax avoidance would still go on, even at lower rates. It's about fixing the issues with the tax code that companies like Apple or GE are too willing to take advantage of.


Auntianne
Auntianne

@ZacPetit  So  do you support  avoiding paying taxes if you can get away with it or better yet   offshore  accounts for evasion ? And who  then supports  Your police , fire, next disaster  rescue, schools , bridges,  roads  military,  schools,

PerryWhite1
PerryWhite1

@grape_crush @ZacPetit It's just amazing how the right-wing answer to every problem is "lower taxes." Even when doing so would exacerbate the problem (corporations not paying their fair share). I guess when all you have is a hammer, everything looks like a nail. Or more to the point, the right wing thinks the only thing worth doing is making sure the wealthy hang on to more of their money, and to hell with everybody else.

It used to be in America we all wanted to pitch in and help out. Neighborhoods jointly monitored children. Children joined the Boy Scouts and Girl Scouts, and merit badges were mostly for community service. We had "paint up, fix up" days and paper drives at the local school. And I never once heard my parents complain that they were "taxed enough already." My father was in the military, and my mother taught the mentally disabled. They were both rock-ribbed Republicans, but believed deeply in community service -- what current Republicans sneer at as "community organizing."

I still consider it patriotic to pay my taxes, with which I pay for the education of children I do not know, for fire and police protection I will probably never need and a post office which still delivers to rural people I will never meet. I am glad to do this, because I'd rather those people I do not know live decent lives, instead of miserable ones, because that is what Jesus taught. And I am glad to help people I do not know because the more people make the more they spend, which improves the economy, and  a rising tide lifts all boats, including mine. And I'm glad to help people I do not know because the more they are included in society, the less they will fall out of it and fill our prisons. As Oliver Wendell Holmes famously said, "I like to pay taxes. With them I buy civilization."

But a strain has developed in America since my youth, of people whose motto is "I got mine, Jack." People like @ZacPetit and @PaulDirks above, whose immediate impulse in every situation is to afflict the afflicted beyond conscience and comfort the comfortable beyond reason. People like the two senators from Oklahoma, who both voted against federal aid to New Jersey, but still feel entitled and remain without contrition, demanding federal aid for their state. 

This attitude is a malignant cancer on the body politic. It is born in selfishness, nurtured in ignorance, given intellectual cover by Ayn Rand and flattered by Fox News and Rush Limbaugh. But it is nothing short of evil. 

The people who espouse this philosophy may not be evil, but they mindlessly repeat Frank Luntz's talking points and grow this evil in the hearts of others. Because selfishness is in all our hearts, and must be deliberately contained or it will grow. And yet we have huge organizations and deep pockets everywhere in this country -- from the Koch brothers to Peter G. Petersen to the Heritage Foundation to Karl Rove's groups to, yes, Fox News -- who encourage that selfishness because it lines their pockets and promises more power. Selfishness abetting selfishness in a vicious circle.

That is why I post here. That is why I no longer hold my tongue on politics online and at home. Because this evil is growing, not shrinking. And as Edmund Burke said, "All that is necessary for evil to triumph is for good men to do nothing."

bryanfred1
bryanfred1

The cash stays offshore because bringing it home would subject it to a 35% tax on top of whatever was paid in the country of origin.  No executive on the planet can justify handing over a third of a company's already-taxed foreign earnings.  So it is trapped outside the U.S. and reinvested elsewhere.  It makes much more sense to reduce or eliminate taxes on repatriated funds.  At least that way SOME companies would bring it home instead of parking it in the Caymans; right now the cost of investing foreign earnings in the U.S. is 35%; investing them where earned is 0%.  Not difficult math; it makes the hurdle rate for U.S. project impossibly high.

PaulDirks
PaulDirks

@Auntianne @ZacPetit A Corporation's primary responsibility is to it's shareholders. Avoiding taxation is among their responsibilities. If we start writing the tax code with more of an eye toward collecting revenue instead of using carve-outs and incentives to modify behavior, we'll have much more success at job 1 which is generating revenue.