Apple CEO Tim Cook testified today in Congress about how his company managed to evade billions of dollars in taxes. Most of the questioning has been about tax loopholes. But that’s only part of the story. The other part is perhaps more important, and more destructive.
In the United States, we’ve seen notable growth since the recession. We are very sluggishly moving back from the lows of the financial crisis. Even that modest progress stands in stark contrast to the rest of the world, which is, by and large, still suffering.
The major flaw of our recovery has not been the pace, although certainly it could have been much faster. Instead, the major flaw is distribution. The economy is growing, but corporations and the richest Americans are capturing the lion’s share of the proceeds from that growth. You’ve likely heard a lot about the one percent--in the first year of the recovery, they captured 93% of the income gains—but the story of America’s corporations is even more troubling.
We’ve seen systemic inequality in our country growing for decades, even before the latest financial crisis. Between 1979 and 2007, income for the top 1% grew by nearly 300%, while it grew by just 18% for the bottom quintile of earners. This is, of course, worrisome in itself, and not just as an economic problem. Our founders feared the political consequences of yawning inequality and class conflict, of allowing wealth to aggregate in the hands of the few. Referring to people who own property and those who don’t, James Madison wrote in 1787:
The most difficult of all political arrangements is that of so adjusting the claims of the two classes as to give security to each, and to promote the welfare of all.
We are seeing the consequences of systemic, growing inequality play out now in our politics. Inequality has been slowly corroding the basic project of collective governance for three decades. A more recent and perhaps even more troubling problem, though, is the aggregated prosperity of American corporations.
Neoliberal economic theorists will tell you that keeping corporate taxes low is good for the economy. The more money corporations have, they say, the more they will be able to reinvest in the economy, make new things, create new jobs and grow opportunity broadly for all. But that’s not what’s happening right now. Since the early 2000s, corporations are gobbling more cash than ever before, and rather than reinvesting it, they’re just sitting on it.
No one knows quite why. There are a number of plausible theories. Paul Krugman told Up in February that it may be as simple as this: corporations are “making so much money, they don’t know what to do with it.” At the end of 2012, for example, Apple had accumulated nearly $140 billion in cash, and was doing absolutely nothing with it.
In a consumption-based economy, this trend is untenable. When people make money, they buy things; demand for products goes up, so companies make more products, hire more people, and so forth. That is the basic model upon which our economy is founded. But right now it is broken. A cog somewhere is not turning, but no one knows which cog it is.
In the meantime, corporate profits continue to soar. The higher corporate profits soar and the more cash corporations hoard, the less they reinvest in the economy. Workers, meanwhile, make less and less. The divergence between employee compensation and corporate profits, as illustrated in the chart above, is at an all-time high.
The economic and political consequences of this divergence cannot be overstated. One simple first step would simply be to try to re-capture some of those aggregated profits by raising taxes on corporations, and by taxing off-shore profits. Right now, we have a peculiar system that taxes the profits corporations make here on American soil, but allows them to pay only foreign taxes on profits they make overseas. Which brings us back to the story of Apple.
The moneyed class and their patrons in Washington are arguing that we can fix the corporate tax problem not by taxing off-shore profits, but by allowing corporations to repatriate those profits back to the U.S. without having to pay American taxes. They argue that bringing that money back to the U.S. will allow corporations to reinvest it in the economy. We may lose some potential tax revenue, they say, but we’d make up for it in all the new jobs and economic activity we would get.
Except, of course, the experience of the last decade or so tells us otherwise.
Apple argues that its off-shore profits should only be subject to off-shore taxes. As if those off-shore profits had nothing to do with America. Of course, they do. Apple may sell products across the world, but the company is based in America for a reason. Apple enjoys, indeed exploits, countless legal and economic benefits by operating in America, benefits Apple wouldn’t enjoy anywhere else: basic legal protections, a judiciary that safeguards and enforces the rule of law, an intellectual property regime that affords generous—in fact, overly broad—protections for new ideas and innovations, a world-class system of higher education, a (somewhat) open immigration policy, reliable security, an advanced infrastructure for business development, and countless other benefits from operating in a functional, developed society with a genuine social contract.
As Elizabeth Warren famously put it, “There is nobody in this country who got rich on his own.” In the same way, there is no company in this country that got rich on its own. Corporations like Apple are hampering the economy and corroding our political system by hoarding hundreds of billions of dollars in cash. They owe the American people back payments.
Sal Gentile is a senior producer for Up w/ Steve Kornacki.