May 22, 2013

You know the world’s gone mad when I think Rand Paul is the only one who made sense at Tuesday’s Senate grilling of Apple chief executive Tim Cook. Cook’s crime? Making sure his firm pays as little in taxes as the law allows.

Paul said he was “offended by the spectacle of dragging in executives from an American company for doing nothing illegal.” If you saw the screaming front-page headlines in every major newspaper pegged to the Permanent Subcommittee on Investigation’s report, you would be forgiven for thinking Cook would be ushered straight from the hearing to jail.

Why are we publicly browbeating an iconic U.S. firm in an era in which we should be encouraging every innovative company to locate and expand high-value work in America? What kind of message do hearings like this send to firms overseas (or U.S.-based multinationals weighing their capital plans) about America being open for business and hungry for job-creating investment?

Once upon a time, Democratic senators like Paul Tsongas of Massachusetts wisely quipped that “you cannot love employment and hate employers.”

But common sense has given way to easy grandstanding.

Carl Levin thundered that Apple’s tax avoidance causes “real harm.” (Put aside that Apple may pay more taxes than any company in the country.)

John McCain — who owns so many homes he’s lost track, thanks to his wealthy father-in-law’s shrewd management of his business affairs, including, presumably, taxes — couldn’t wait to jump in. In high McCain dudgeon, he called Apple’s tax strategies “complicated and pernicious.”

Complicated? What tax strategy isn’t? But pernicious?

Where to start?

First, Cook and his colleagues have a fiduciary duty to minimize Apple’s taxes under the law. The ways and means may be arcane and look fishy to the untutored eye, but Apple didn’t make the rules, it’s playing by them. What pension fund that owns Apple shares would cheer its bosses for paying more in taxes than the company legally owed?

The real scandal isn’t Apple’s planning but the enormous waste of human talent now dedicated to shrinking corporate America’s tab because of the complexity of the tax code. Brilliant minds that might have invented new products or services, or even pursued humbler vocations (such as gardening) that improve the human condition, end up marinating for decades in byzantine fusses over “transfer pricing,” “income-shifting” and “deferral.”

I knew some of these folks back in law school. The students drawn to tax law were among the smartest. They loved intellectual puzzles. They’re now paid exceedingly well to crack them. I still feel a little sad for them, though. Who wants to contemplate a deathbed realization that the talent you possessed in your one life on Earth had been given over to reducing corporate tax liabilities? (By the way, it’s not clear that a columnist’s deathbed reckoning will be any less laced with feelings of futility and regret, but that’s therapy for another day.)

The confusion many senators felt about their role in the spectacle accounts for the weird verbal zigzags on display. If lawmakers grunted in monosyllables like Tarzan, they’d have thumped their chests and said, “Apple good, Apple taxes bad.” Sen. Claire McCaskill’s oozing protestation — “I love Apple! I love Apple!” — only made her half-hearted attempt to plunge the shiv in more vexing.

Yet lurking behind Tuesday’s kabuki dance is a seminal issue, if only our debauched political culture can tackle it head-on.

That issue is this: The fate of companies and countries in a global age now diverge. The success of U.S.-based multinationals no longer assures the prosperity of American workers. If our schools leave much of our workforce unprepared, or our health-care system leaves costs uncompetitively out of control, these firms can find the next tranche of talent and services they need in Singapore or China or New Zealand.

American-born executives at the helm of such firms are uncomfortable talking about this on the record. But in private they’ve told me the truth: These trends may be a pity for their country, but they’re not really a problem for their business.

This is the depressing disconnect Congress should be chewing on — not sideshows like one firm’s tax planning. Yet broader tax incentives, if properly designed, might offer a step in the right direction.

Ralph E. Gomory, an octogenarian and a former head of research at IBM who turned policy crusader, put it as follows when we spoke for my 2009 book “The Tyranny of Dead Ideas”: Companies want profits; countries want gross domestic product. In the old days, profits and GDP mostly went together in the United States for U.S.-based firms; nowadays, profits are increasingly found elsewhere, and that’s costing America some GDP.

The answer, says Gomory, is to reward the kind of behavior we want and, thus, “realign the interests of companies with those of the country.” Only in America is there a laissez-faire attitude toward this question. Gomory believes that we should adjust corporate tax rates according to the value added by the workers of corporations operating in the United States. A company with high value added per U.S. employee would pay a low tax rate, and those with low value added per U.S. employee would pay a high rate. This would encourage companies with high-value-added jobs to locate their operations in the United States.

Under an approach like this, of course, Apple might be looking at a tax cut, not a tongue-lashing. The moral of the story? Making Apple out to be rotten gets senators great press while solving precisely nothing.

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