Don't Let Apple's $38B 'Repatriation' Tax Payment Fool You: It Was Forced

In his endlessly excellent 1992 book, The Twilight of Sovereignty, then Citibank CEO Walter Wriston made the essential point that dollars “parked overseas” weren’t necessarily “overseas.”  Even though 2/3rds of dollars were then, and are now, in "foreign hands," odds are that many of those dollars are being directed to their highest use right here in the United States.

Crucial about all this is that the money exchangeable for goods, services and labor never lies idle.  More to the point, banks don’t pay for deposits just to stare lovingly at the money.  They would be insolvent if so.  Money saved is money lent.  Period.

That’s why the years of commentary about $2.5 trillion in U.S. corporate profits allegedly “stranded overseas” was always so ridiculous.  As this column pointed out numerous times, foreign earnings weren’t being placed in vaults by U.S. corporations.  Money saved is once again money lent.  While there should be no repatriation tax, let alone a corporate tax, the notion that a high tax on money returned to the U.S. had somehow resulted in $2.5 trillion stuck overseas defied basic logic.

More realistically, the only closed economy is the world economy.  Per the late Wriston (he died in 2005), money goes where it’s treated well.  The latter is a reminder that of the trillions allegedly stashed overseas, much of it was likely here the whole time.  The U.S. is a preferred destination for investment, and for people eager to protect their wealth.

Yet to be clear, not all of the foreign earnings came back to the U.S., and they didn’t for obvious reasons.  While politicians, pundits and economists think they can engineer outcomes through legislation, corporations can’t be so naïve.  They’re operating at the pleasure of their shareholders.  As such, they have to justify their investments.  They do so by considering their capital commitments with desired investment returns very much in mind.  They can’t return money to specific countries just to "create jobs" in order to please politicians and Keynesian economists who still believe that unspent wealth sits idle. 

All of this matters simply because the world economy continues to liberalize.  Because it does, it’s only logical that U.S. businesses would not only be earning foreign profits, but that they would also be reinvesting foreign profits back into those operations.  Consider Starbucks.  The number of Starbucks in Shanghai is double the number in New York City.  For luxury carmaker Cadillac, it’s the #4 selling luxury brand in China.  These are but two examples reminding us that U.S. corporate profits haven’t been “stranded” overseas as much as there are very real opportunities for them to earn substantial profits outside the U.S.

That’s why this column repeated over and over again how economically meaningless a “repatriation holiday” would be whereby foreign profits would be “returned” to the U.S. at a lower tax rate of 15 percent.  Why would companies like Apple pay 15 percent of shareholder money to the federal government if they could simply borrow any funds needed, only to pay no tax? Better yet, they could borrow while deducting their interest payments against taxes.  The idea of a repatriation holiday was always oversold.  Again, profits earned “overseas” were already here as is to the extent that domestic opportunities rated the investment inflow. 

And then Apple happened.  Apple announced the "return" of hundreds of billions in overseas profits, along with hiring in the U.S. To proponents of repatriation, Apple’s move somehow proved the genius of the one-time, lower repatriation tax.  Except that it didn’t.

About all this, it can’t be stressed enough that the corporate tax should be zero.  Corporations are owned by individuals, and individuals have already paid taxes on their individual earnings.  How truly backward that their investments in companies would be penalized.  How offensive that they’re penalized while income from munis and Treasuries isn’t taxed at all.  Get rid of the corporate tax.  The tax code should not be penalizing investment without which there are no companies and no jobs. 

Still, the story about tax changes leading to a supposedly benevolent return of Apple money to the states was riddled with falsehoods.  Important here is that Apple is not at fault.  Apple is the victim of a political class that has a voracious desire to consume wealth always and everywhere created in the private sector. 

As everyone knows by now, Apple announced a $38 billion tax payment on the hundreds of billions it has overseas.  So while it’s possible that most of that money was already in the U.S. (see Wriston above, along with basic financial logic), Apple is now handing over $38 billion in taxes to the feds.  Why? The answer is simple, and disturbing at the same time.  Congress didn’t write into law a one-time 15 percent repatriation tax that was voluntary.  In truth, there’s nothing voluntary about the tax.  Logically, one supposes.  If voluntary, no corporation would pay it.  Remember, corporations properly work for shareholders.  Why pay a tax to repatriate profits that are likely already here?

The “low” tax on overseas profits is mandatory.  For Apple and corporations with money “overseas,” the tax is mandatory whether they bring it back or not.  So if you’re Starbucks and you see big potential in China, Congress wants its 15 percent first.  If you’re Cadillac and you want to build on your growing popularity in China, Congress must be paid too.

This forced taxation is bothersome on so many levels.  For one, it’s yet another huge tax foisted on individuals.  Worse, it’s a tax levied on every American given the basic truth that Congress doesn’t take in taxes to stare lovingly at the dollars.  Those dollars in fact signal rising federal control over the U.S. economy.  In short, the allegedly generous “repatriation holiday” amounts to another federal revenue grab that will enhance the role of Washington in the U.S. economy.

About all this, the Republicans should be ashamed.  Having billed themselves the party of small government, they keep devising ways to increase the flow of our wealth to government.  Here’s hoping there are a few wise party elders who might remind them of what’s true: if a tax cut leads to a revenue increase, then taxes weren’t reduced nearly enough.