Apple is such a runaway success that its profits pile up like snowdrifts in the Rockies. At last count, Apple was sitting on $165-billion (U.S.) in cash and securities. That’s more than the GDP of Hungary.
What to do with the windfall? Every investor, fund manager and hedge fund boss has an opinion. Some enlightened souls think Apple should double up its R&D program as rivals such as Samsung crowd the smartphone space (Apple’s last big hit was the iPad, launched in 2010). Less enlightened souls think it should spend fortunes returning cash to shareholders in the form of greater dividends and share buybacks.
In early 2013, David Einhorn of Greenlight Capital put enormous pressure on Apple to launch a perpetual preferred stock that would return hundreds of billions of dollars to shareholders. His pitch failed, but Apple delivered a consolation prize by doubling the value of a share buyback and dividend program to $100-billion (U.S.).
Here’s another idea: Give the surplus cash back to the taxpayer.
It will never happen, but if you believe that the stakeholders who are responsible for Apple’s success should be rewarded, taxpayers would certainly take precedence over the hedgies. Greenlight and its ilk had absolutely nothing to do with Apple’s journey from garage start-up in 1976 to the world’s most valuable tech company. They did not provide any of the capital. Apple has tapped the public markets only once, in 1980, when its initial public offering raised $97-million (U.S.). In fact, taxpayers provided the lion’s share of the funding for many of the key inventions that are built into every Apple device.
True, Steve Jobs, Apple’s late co-founder and CEO, deserves a lot of credit. Under his guidance, the company shrank a laptop computer to the size of a phone to give the consumer a communications and entertainment device that worked like a dream, and became a fashion statement along the way.
But what powers the iPad, iPhone and iPod? Lithium-ion batteries developed by the U.S. Department of Energy. How about the devices’ liquid-crystal display? That came from the National Institutes of Health, the National Science Foundation and the Department of Defense. The Internet, GPS, SIRI (the intelligent personal assistant used in Apple's operating system) and DRAM cache did not start life as Jobs’s back-of-the-envelope doodles. They came out of the U.S. Defense Advanced Research Projects Agency and other government bodies.
Governments also supplied much of Apple’s brainpower. Thousands of its engineers and technicians have been recruited from the finest U.S. (and Canadian and British) universities. “Operating in the United States, Apple should recognize that the knowledge base on which its success has been built can be traced back to government investments,” said academics William Lazonick, Mariana Mazzucato and Öner Tulum in a 2013 paper titled “Apple’s Changing Business Model: What Should the World’s Richest Company Do with All Those Profits?”
The concept of imposing a special fat-profits tax on a single company is legally absurd and morally dubious, but the concept of imposing taxes on the supernormal profits of companies that benefit the most from government spending (such as those in the technology and defence industries) is not. Even that is probably unworkable, however, because devising a legal definition of “supernormal” would be more difficult than buying an iPhone with a long battery life. And no CEO would admit that some profits are not due to sheer genius at the top.
So here’s another idea: The least that companies who feed with alacrity at the government trough could do is pay their taxes. Apple’s tech innovation is matched only by its canniness in avoiding taxes.
Apple and other profitable companies want it every which way. Apple taps into the U.S. government’s research gusher while it feasts on R&D tax breaks. It sucks up government-subsidized university graduates while it exports manufacturing jobs—its main assembler is Taiwan’s Foxconn, whose factories are largely in China.
Like just about every U.S. multinational, Apple also takes advantage of a tax loophole that dates back to 1960. Companies don’t have to pay a 35 per cent federal tax on profits until those earnings are repatriated. At the end of Apple’s fiscal year in September, 2013, it had stashed $111.3-billion (U.S.) in cash in its overseas subsidiaries. U.S. legislators said that Apple avoided more than $9-billion (U.S.) in taxes in 2012 by booking sales overseas. It routed much of its revenues through Irish subsidiaries that pay tax nowhere, though they do pay U.S. tax on their investment earnings.
Apple’s lavish profits and cash horde have a lot to do with outstanding innovation, design and marketing. They also have a lot to do with government R&D and crafty tax avoidance. To take so much from the government and give relatively little back is shameful.