The interaction between big businesses and small countries can be strange. Add in a big, transnational government, and things get even stranger.
Apple is in trouble — largely symbolic trouble — over the taxes it owes to the government of Ireland. Apple insists that it has paid its taxes. The government of Ireland . . . also insists that Apple has paid its taxes.
The European Union is of a different view.
I’m told that “British” is a horrifying term of abuse in the Republic of Ireland, but the ladies and gentlemen in Dublin are getting a good big dose of what made their former countrymen to the east wave a big middle finger called Nigel Farage at the busy-bodies in Brussels and declare their intention to skedaddle right out of the European Union post haste. They might want to follow the British example.
Of course, it’s unlikely that Ireland would leave the European Union.
Applexit? Maybe iLeave?
Ireland has relatively low corporate taxes for a European country, which means that it has considerably lower corporate taxes than does the United States, which for various stupid reasons maintains the highest business-tax rate in the civilized world, which is what this really is all about in the end.
That’s only marginally of interest in Brussels. What Brussels cares about right now is that Ireland has lower taxes than many other EU countries, which creates what the masters at the EU regard as unfair and undesirable “tax competition.” Competition apparently is great for markets (hurrah, choice!) but not for governments (hurrah, monopoly?), at least from the EU point of view. The EU is, after all, a creature of the public sector and of the political movements most closely affiliated with the public sector, and the public sector likes its tax rates high, its revenue streams strong and steady. That the lords of Copenhagen (Danish corporate tax rate: 24.5 percent) should have to compete with the lords of Dublin (Irish corporate tax rate: 12.5 percent) is considered unseemly, even as all of them enjoy their competitive advantage over the grubby little lords of Washington (U.S. corporate tax rate: 39 percent). Competition is for taxpayers, not for tax-collectors.
Apple doesn’t pay 12.5 percent in Ireland. It reached an arrangement with Dublin back in the early 1990s — a perfectly legal agreement that any sovereign state would be entitled to enter into — that leaves it paying a much lower effective tax rate. The ladies and gentlemen in Dublin like this arrangement just fine, because even at a low rate, they get to collect a heap of taxes from a firm that otherwise wouldn’t have much reason to do any business in Ireland other than retail sales, a firm that employs thousands of Irish workers at very good wages and that keeps parked on its Irish books some $200 billion in liquid assets, or about $44,000 for every man, woman, and child in Ireland. That’s one company.
The Irish are said to be charming, but it isn’t good conversation that’s keeping all that Apple schmundo over in leprechaun-land. It’s the 39.1 percent tax bite U.S. authorities would take if those profits were repatriated to the United States. It isn’t the weather, or the infrastructure, or the work force that has companies like Apple and global pharmaceutical giants going big in Ireland, though Ireland can boast of having great assets in all those areas.
It’s the money. Profitable firms like to keep their profits.
Apple engages in some legal and accounting hijinx to make all this happen in Ireland. But none of what it does is illegal, so far as the U.S. government is concerned. None of it is illegal so far as the Irish government is concerned. And it’s not exactly illegal in the European Union’s view — just not the way Brussels would like to see it done. The European Union has ordered the Republic of Ireland to collect back taxes that the Republic of Ireland says are not owed to it. If Ireland is indeed still a republic and not a prefecture of a European superstate, then it has the sovereign authority to make final determinations in such matters for itself. If Ireland doesn’t have that power, then it seems like the Irish went to a great deal of trouble in pursuit of that whole national-sovereignty thing.
Washington is, quietly and sometimes not-so-quietly, on Brussels’s side in this business. That’s because it thinks of that $200 billion Apple has on its Irish books as its own money, at least 39.1 percent of it. It’s a familiar and unedifying process: The geniuses in Washington create enormous and powerfully perverse economic incentives, companies and individuals respond to those incentives in a way that complies with the law, and the geniuses in Washington denounce the taxpayers for following the laws written by the geniuses in Washington. That happens domestically, as when private-equity firms pay the capital-gains tax on their capital gains (weird, right?) instead of the much higher corporate-income tax rate, which doesn’t actually apply to their capital-gains earnings. The people in Washington are by education (“education”) overwhelmingly lawyers, so they usually know better than to claim that anything illegal has been done, which is why we get into speeches on “economic patriotism,” an ancient fascist expression that has found favor among Democrats such as Bernie Sanders, Hillary Rodham Clinton, and Barack Obama in recent years.
We could decry overseas tax shelters for the next decade or two, and change absolutely nothing, or we could — here’s a crazy idea — be the tax shelter. You know what Ireland, Norway, and Sweden all have in common? Within living memory, all were desperately poor. That’s why there are more Irish Americans than Irish nationals, more Norwegian Americans than Norwegians, and more Swedish Americans than Swedes. Hunger will make you get on a boat. Sweden grew wealthy under a form of laissez-faire capitalism strikingly different from the EU norm today, with lower taxes and a smaller public sector than its European counterparts. Norway did much the same thing, helped along by a great deal of oil (which can be both a blessing and a curse). Ireland eventually got sick of being poor and followed a similar program.
It would be interesting to see what would happen if that strategy were followed by a very rich nation — one that accounts for something like a quarter of the economic output of the entire human race. One need not give in to the fantasy of self-funding tax cuts to consider that there might be some significant growth effects and a great deal of new innovation if a whole lot of business that’s being done in Ireland and Singapore and Korea got done in California and New Jersey and Texas instead. The corporate tax code already is filled with so much crony-tastic favoritism that politically connected firms pay relatively low rates. Why not make it a good deal across-the-board and out-Irish the Irish with a 10 percent flat tax on corporate income? Corporate taxes in total only account for about 11 percent of federal revenue, so we wouldn’t even have to cut that much spending to make it revenue-neutral. There are other tax reforms that should be made, but cutting — or eliminating outright — the corporate income tax isn’t the worst proposal on the books, either.
Don’t fear the tax shelter. Be the tax shelter.