Let’s deep-six loophole that allows Apple & other U.S. companies to avoid U.S. taxes on foreign earnings

For those still wondering who benefits from the government intervention into the economy, I refer you to the case of Apple.

Apple management wants to shore up its recently plunging stock by increasing the dividend and instituting a stock buy-back program.  Higher dividends tend to raise stock prices, as do stock buy-backs. Apple has plenty of cash, so why not? As of 18 months ago, the computer and gadget behemoth had some $76.2 billion cash on hand, more than the federal government had at that time.

Except that the cash-rich and debt-free Apple is borrowing money to pay investors and buy its own stock. And why would it do a thing like that?

The federal government has forced interest rates to historic lows, so Apple can raise the money cheaply. But, you may inquire, wouldn’t it be cheaper still if Apple spent some of its golden horde?  The problem is that much of that money is overseas and before Apple can spend it to shore up its stock price, it must repatriate it, which means paying taxes.

Thus the net effect of a loophole in the tax laws for big multinational corporations and the Federal Reserve Board’s constant pressure to keep interest rates low is to give Apple a chance to have its cake and eat it, too: to pay off investors, yet to keep the money overseas and probably earning a good rate of return in a mix of high-yield bonds of foreign governments.  Keep in mind that Apple, like many multinationals, may have earned some of that money in the U.S. and through legal accounting stratagems transferred the earnings to its foreign entities, thus shielding the earnings from U.S. taxes.

The pretext for keeping interest rates low is to stimulate investment in job-creating businesses. That’s also the excuse that large corporations are giving for wanting to have a tax holiday from repatriated foreign earnings. They don’t mention that last time there was a tax holiday on foreign earnings in 2005, most of the money went to buy back stock and pay off executives.

Large companies seem to prefer to line the pockets of their owners and executives over investing in jobs, which in all likelihood reflects their collective belief that there is no additional market demand that would require expansion.

The government could create that demand by closing the loophole that allows companies to shield earnings by realizing them in foreign ventures. The additional tax revenues could be used to support the victims of our economic travails since the real estate bubble burst in 2007-2008. It could be used to invest in research to commercialize alternative energy like wind and solar. It could build mass transit systems or rebuild roads, bridges and government buildings. It could decrease the size of classes in elementary schools. Any or all of these government actions would pump money into the economy and give large corporations a reason to invest as opposed to sitting on their money. Of course with a stronger economy would come higher interest rates, and then Apple couldn’t borrow money to pump up its stock.

Let’s face it: The goal and end result of virtually all government intervention into the economy is to help a handful of large multinational corporations and investment banks. It’s called socialism for the large and wealthy and it works just fine in the United States—for about one percent of the population.


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