We instinctively assign national identities to large global corporations. Toyota is Japanese; IBM is American; Siemens is German; Samsung is Korean. We assume these big firms reflect their national origins and act as informal instruments of government policy. Up to a point, this is probably true. Companies’ personalities do embody the culture and values of their place of birth. No doubt many executives feel patriotic toward their homeland. But as these multinational firms spread their sales, production and marketing activities around the world, their interests and loyalties seem more murky, conflicted and stateless.
This may explain, I think, the muddled reaction to the recent appearance of Apple chief executive Timothy Cook before the Senate Permanent Subcommittee on Investigations. You may recall that the subject was Apple’s ability to shelter a huge slice of its global profits from taxation. A subcommittee staff study found that from 2009 to 2012 Apple had paid almost no taxes on about $74 billion in profits earned outside the United States. These global profits were diverted to Ireland, which levied almost no tax. The legal mechanics of how this occurred were less impressive than the sheer magnitude of avoidance.
Yet, Cook was unapologetic. “We pay all of the taxes we owe,” he said. On profits earned in the United States, Apple is “the largest corporate income taxpayer,” sending nearly $6 billion to the Treasury in 2012. Beyond this, he contended that Apple has generated 600,000 U.S. jobs: 50,000 at Apple and about 550,000 at other companies to support Apple products in engineering, manufacturing, logistics and software. For good measure, he added that Apple does virtually all its R&D in the United States.
I judge this contest a draw. No one claimed Apple acted illegally, and the company has an obligation to shareholders to minimize taxes. Still, with the U.S. government — and most governments — facing huge budget deficits, the spectacle of such a successful firm dodging so many taxes seems morally suspect. What about collective responsibility? On the other hand, I suspect that many Americans (even those, like me, who don’t use its products) take pride in Apple’s success as confirming our national economic “genius.” We cut Apple some slack because it reflects well on us and because jobs may matter more than taxes.
Here’s the basic tension. We still regard these firms as expressions of national power and prestige, even as they depend increasingly on non-American revenues. In his statement, Cook noted that non-U.S. markets accounted for 61 percent of Apple sales in 2012; in the latest quarter, two-thirds. For Procter & Gamble (Crest toothpaste, Pampers), the American market represents only 35 percent of sales. At IBM, about 85 percent of 2010-2012 sales growth occurred in overseas markets.
Even if some overseas factories return to the United States (as seems to be occurring), many U.S. multinationals will expand more abroad than at home. These overseas markets are simply growing faster. To sell in them, multinationals need local sales forces, distribution networks and service centers. To be sure, foreign expansion doesn’t ordain domestic contraction. Growing international operations often require added U.S. support services and research and development (more than 80 percent U.S.-based), notes Dartmouth economist Matthew Slaughter. Consider Caterpillar, the maker of earth-moving equipment. From 2002 to 2012, foreign sales went from 55 percent to 69 percent of the total. Although overseas jobs jumped 54 percent, U.S. employment also rose 12 percent.
Just where companies locate reflects many factors: a country’s economic outlook; labor costs and skill levels; exchange rates; business climate; political stability; and official policies. Governments compete for multinationals’ investments, technology and business know-how. Tax havens are one consequence of competition. If the United States treats American multinationals too harshly, firms will shift operations and even headquarters and legal identities elsewhere.
Taxes crystallize the problem. By one view, American policy is actually too lenient toward multinationals: U.S. taxes on most foreign profits are deferred until the profits are repatriated to the United States. Naturally, as with Apple, profits are often left abroad; according to one estimate, they now total about $1.9 trillion. Raise rates on foreign profits, say critics. Bring some home. The rebuttal from companies is that the 35 percent top U.S. corporate tax rate — the highest among advanced nations — deters U.S. investment. Lower U.S. rates, say companies. More foreign profits would return; U.S. investment would rise.
Maybe do both: raise taxes on foreign profits; use the resulting revenue to cut the 35 percent corporate rate. See what happens. But even if U.S. investment responds, the great schism will endure. Multinationals are becoming increasingly cosmopolitan while we still view them as national champions.
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