Wealth inequality has been widening since the world embraced globalization in the 80s. The situation became worse after the financial crisis in 2008 prompted worldwide monetary easing.
In his book “Capital in the Twenty-First Century”, French economist Thomas Piketty attributed the yawning gap to the fact that return on capital has been outstripping the pace of economic growth and wage gains.
This makes the rich even richer while by contrast, those who lack capital and need to work for others find it difficult to climb up the social ladder. The inequality, critics say, has weakened the foundation of capitalism.
Feeling the social pressure, some billionaires have voluntarily suggested paying more taxes. Warren Buffet urged the US government to charge higher tax rates on the richest. In Hong Kong, the city’s wealthiest man — Li Ka-shing — suggested that local authorities should consider raising the corporate tax.
That said, some global firms are pushing back on the issue of tax strategies and profits repatriation.
Apple CEO Tim Cook said recently that his company decided not to bring its overseas profits back to the US “until there’s a fair rate”.
“It’s not a matter of being patriotic or not patriotic,” he added.
Cook’s comments are understandable from a businessman’s perspective. Billionaires and entrepreneurs will try to maximize their profit and pay as less tax as possible.
In that sense, the stance of both Buffett and Li looks quite unusual. But from another angle, their proposals make perfect business sense.
The two super-successful tycoons are known for their unparalleled vision. They understand that companies can sustain growth only if the society as a whole continues to prosper. Therefore, they care about their businesses as well as the outlook of the society. To them, paying a bit more in taxes to defuse the inequality crisis might be the most cost-effective solution.
Now, what about Cook? What could be behind his seemingly very different take on the tax issue?
Cook said in an interview with the Washington Post that Apple needs to pay close to 40 percent tax, including 35 percent federal tax and then a weighted average 5 percent of state tax.
“We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate,” he said, urging the US government to undertake corporate tax reform.
Currently, Apple is sitting on a massive cash pile of over US$200 billion. But over 90 percent of that is parked in overseas bank accounts. It’s estimated that the tech giant has saved up to US$80 billion in tax payment by leaving profit overseas.
“The tax law right now says we can keep that in Ireland or we can bring it back,” Cook noted. “It is legal to do. It is the current tax law.”
However, some observers say that the success of iPhone is mainly due to the brand and R&D in the US, and therefore the company should pay more tax in the US.
“It doesn’t go that the more you pay, the more patriotic you are,” Cook argued, adding that many other American companies will continue to fight the US government over tax issue.
Meanwhile, both Donald Trump and Hillary Clinton agree the US tax system needs to be changed.
Trump, the Republican presidential candidate, has pledged to lower the tax rate on all business income to 15 percent from the current 35 percent.
His democratic rival, Clinton, meanwhile said she supports the “Buffett rule,” which would require millionaires to pay at least 30 percent of their income in taxes, and overhaul existing corporate tax system to encourage companies to bring profit back to the US.
Cook’s remarks could have been aimed at pressuring the candidates into making bigger commitment on tax reform.
Offshore tax avoidance arrangement is very common among multinational firms. Recently, G20 finance ministers and central bank governors reiterated that they aim to stem such activities.
Cook’s hidden message to US authorities might be this: “If you lower the rate, Apple will be happy to bring the money back.”
This article appeared in the Hong Kong Economic Journal on Aug. 19.
Translation by Julie Zhu
[Chinese version 中文版]
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