Apple already has more money than God — $155 billion, to be exact — but now its borrowed $3.5 billion more in European markets. Why does it need to add to its war chest? Is it burning through its cash pile on R&D for an iCar? Or on its own non-lame version of Google Glass? Of course not! Theres no such thing as a non-lame version of Google Glass. This is just tax arbitrage, pure and simple. Financial engineering, in other words, is Apples hotly anticipated new product. Lets step back. The U.S. has whats called a worldwide corporate tax system. That means we tax the difference between what multinationals pay abroad and would pay here when they bring their overseas earnings back home. In theory, this should discourage companies from moving their headquarters to the lowest (or no) tax jurisdiction they can find, since theyll eventually have to pay up anyway. But in practice, this eventually is really a never because of the If-You-Give-A-Mouse-A-Cookie Principle. The Bush Administration, you see, instituted a tax repatriation holiday in 2004 that let multinationals bring back their money at a special rate of 5.25 percent (and really just 3.7 percent due to foreign tax credits). The result, as the Center on Budget and Policy Priorities points out, was a flood of money that exclusively went to share buybacks and dividends, even as those companies cut jobs. Even worse, this just made corporations shift even more income abroad in anticipation of these one-time holidays becoming a regular part of our tax calendar. Thats part of the reason why tech giants like Apple keep looking for every overseas tax loophole — sometimes paying nothing — as their foreign cash has piled up to almost absurd levels. Theres one little problem, though. What if the repatriation holiday never actually, you know, happens. Then corporations will be left with more money than they know what to do with overseas, which they cant use here. Now they can use it to buy other companies without incurring the wrath of the taxman — and they have — but theyre out of luck if they want to, repeat after me, maximize shareholder value by paying out profits as buybacks or dividends. Well, unless they use borrowed money to do it. Thats because they only have to pay U.S. taxes if they bring home money they earned, not money they borrowed. So Apple might issue $3.5 billion worth of euro-denominated bonds to take advantage of the even lower interest rates over there, and then use that money to buy its own stock. Now there are two lessons here. The first is that our corporate tax system badly needs a facelift, if not more. That could mean cracking down on inversion deals where U.S. companies buy foreign ones so they could move their headquarter to a more tax-friendly place. Or it could mean lowering our corporate tax rate, although that gets more attention than it probably should given that our effective rate, taking all the loopholes into account, is much lower than the headline one. Or it could even mean shifting to a territorial tax system that doesnt tax overseas earnings, if we could somehow figure out how to do that in a revenue neutral way. But the second lesson is really a question: Why isnt Apple throwing its cash at ideas instead of investors? It really cant come up with anything to spend the money on? I mean, if software really is going to eat the world, including our cars, shouldnt Apple be trying to invent the beautiful hardware that will run it? And Im not talking about a smart watch. I dont really need one when my iPhone already tells me the time. Apple, for its part, would say that it just wants to reward its shareholders because it has more money than it knows what to do with. What its doing is par for the course in international finance. This disconnect between record-high profits and still-low investment, however, is why the recovery still doesnt feel real for most people. Now part of it is that companies still dont see the demand to justify more investment. Another part is that theyre still scarred from the financial crisis. But some of it is the vision thing. Companies would rather spend money on tax gimmicks than on something that might not pan out. An economy is a terrible thing to waste on shareholder value.
Posted on: Sat, 08 Nov 2014 20:00:03 +0000
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