Apple already has more money than God — $155 billion, to be exact — but now it's 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! There's 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 Apple's hotly anticipated new product.
Let's step back. The U.S. has what's 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 they'll 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. That's 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.
There's 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 can't use here. Now they can use it to buy other companies without incurring the wrath of the taxman — and they have — but they're 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. That's 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 doesn't 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 isn't Apple throwing its cash at ideas instead of investors? It really can't come up with anything to spend the money on? I mean, if software really is going to eat the world, including our cars, shouldn't Apple be trying to invent the beautiful hardware that will run it? And I'm not talking about a smart watch. I don't 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 it's 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 doesn't feel real for most people. Now part of it is that companies still don't see the demand to justify more investment. Another part is that they're 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.