- By Mark R. KennedyMark R. Kennedy is president of the University of North Dakota, author of "Shapeholders: Business Success in the Age of Activism," a member of the Council on Foreign Relations, and chairman of the Economic Club of Minnesota. He previously served three terms in the U.S. House of Representatives, was senior vice president and treasurer of Federated Department Stores (now Macy's), was a member of the Advisory Committee on Trade Policy and Negotiation under Presidents George W. Bush and Barack Obama, and led George Washington University’s Graduate School of Political Management.
Apple has traditionally been known as an apolitical company. Americans should be thankful that CEO Tim Cook is abandoning that approach to come to the U.S. Senate today to push for a change to one of the most ill-advised aspects of America’s gargantuan tax code: its global corporate tax structure.
It is true that Apple holds $100 billion offshore, but rather than breaking out the pitchforks, Americans should ask why one of the world’s savviest tech companies is behaving this way.
The United States, unlike nearly every other advanced economy, taxes foreign earnings brought back to its shores. That approach has forced American companies to fight global competitors with one hand behind their backs.
When Apple is competing with Samsung in the cell-phone market or Caterpillar is competing with Komatsu to determine who helps build the skyscrapers in tax-free Dubai, Apple’s California-based and Caterpillar’s Illinois-based workers are at a cost disadvantage because their employer must pay tax on its earnings in Dubai while Samsung and Komatsu do not.
To mitigate this disadvantage, companies have been allowed to defer paying this tax until they bring the money back to the United States. That creates an incentive to invest in international markets, not the United States. This is like America shooting itself in the foot. It’s extremely difficult for a one-armed, one-footed company to compete against multinational corporations whose governments don’t impose additional burdens on their international business operations.
In addition to being a drag on American businesses, it’s also one of the most misrepresented aspects of the tax code. President Barack Obama and others who oppose removing this provision demonize it by calling it a tax loophole that "encourages American companies to ship jobs overseas." It’s a charge that political fact-checkers have disputed, but the line lives on. The true effect is that it simply makes it more difficult for American goods and services to compete in a global marketplace.
In 2004, Congress passed the American Jobs Creation Act that included an opportunity for companies with foreign earnings abroad to bring that cash home at a 5.25 percent tax rate rather than the usual 35 percent. Companies brought over $300 billion back to the United States. Temporary reprieve is helpful, but for the sake of American workers the current system must be scrapped. Leveling the playing field for American companies permanently will pay dividends to shareholders, workers, and consumers alike.
Effectively confronting this job-destroying deception emanating from the Oval Office, the biggest megaphone the world affords, requires the voice of a master marketer with the credibility of leading the company that is perhaps most responsible for any residue of economic optimism remaining in the country.
As Cook recently stated, "I can tell you unequivocally Apple does not funnel its domestic profits overseas. We don’t do that. We pay taxes on all the products we sell in the U.S., and we pay every dollar that we owe." Hopefully the Senate committee hearing from Cook will be as straightforward with the facts about how the U.S. tax system constrains American businesses overseas.
Apple has 50,000 employees nationwide and spurred the creation of nearly 600,000 jobs in manufacturing and software development. The company’s iTunes app store birthed an entirely new industry: smartphone and tablet software design. The company has already paid out $9 billion in royalties to developers. If given the opportunity to bring back profits earned abroad under a fair tax system, imagine how those proceeds could transform the technology market and the American economy.
Haven’t we suffered through self-imposed economic malaise long enough? We should view Tim Cook’s stand as a call for all patriots to rise up and say enough playing politics — let’s help American companies invest in American jobs.
Mark R. Kennedy leads George Washington University’s Graduate School of Political Management and is chairman of the Economic Club of Minnesota. He previously served three terms in the U.S. House of Representatives and was a presidential appointee to the Office of the U.S. Trade Representative’s Advisory Committee on Trade Policy and Negotiations during George W. Bush’s administration.