The U.S. corporate tax rate is about 40%. Ireland’s is 12.5%. Following a tax minimization strategy and legal transfer pricing practices, Apple claims about two thirds of its profits and thus pays the same proportion of its corporate taxes in Ireland—as it morally should. However, many critics, such as a media commentator in a Forbes.com column, insinuate that Apple’s tax avoidance strategy is immoral, because only about 3.5% of Apple’s employees and only a fraction of its customers are in Ireland. The same commentator claims that CEO Tim Cook’s defense of Apple’s tax strategy is “disingenuous” because he does not highlight these facts and insists that Apple would repatriate its income if the U.S. corporate tax rate was “fair.”
Those implying that Apple’s tax avoidance is immoral base their view on the equality of income and wealth as the moral standard. As Don Watkins and Yaron Brook explain in their book Equal is Unfair: America’s Misguided Fight Against Income Inequality, such equality is the wrong standard for moral conduct. Trying to force income equality, as governments do by imposing higher taxes on the more productive, including corporations, and ‘re-distributing’ the tax money to the less productive or the non-productive through subsidies and government programs, does not make anyone better off.
Forced ‘equalization’ through taxation does not enhance human well-being—the correct standard of moral conduct—but harms it instead. The high corporate tax rate in the United Sates (among the OECD countries second only to Saudi-Arabia’s 55%) chases away investment to lower-tax jurisdictions such as Ireland and many Asian countries, as it should.
Corporate investment translates into more job opportunities and economic prosperity, including to those who in their absence tend to depend on government income subsidies and other programs. But when corporate investment flees high tax rates, governments can ill afford their ‘re-distribution’ schemes and start a spiral of economic decline by resorting to ever-increasing debt and interest payments (not only in the United States but also in Canada and in many other mixed economies today). And this, of course, means increasing tax burden to the remaining productive businesses and citizens, tempting them to look for better opportunities to enhance their well-being elsewhere.
The contractual (and moral) obligation of Tim Cook and any other corporate CEO is to maximize the returns for their corporations’ shareholders; that is their fiduciary duty. When governments try to erode the corporations’ returns on their investment on production and trade of material values that benefit all of us, it is the CEOs’ moral obligation to protect the shareholders’ investment and do what Tim Cook and Apple do: legally minimize the taxes their corporations pay. Avoiding taxes legally is necessary to maximize human flourishing, as minimal taxes enhance productivity and creation of material values that benefit our lives.
Only in our mixed economy context that is based on the ideal of equalizing income by taking from the productive and giving to the less productive and non-productive (to the detriment of all) do we hear arguments that corporations should pay “their fair share” of taxes, for example in jurisdictions where they employ the most people or where most of their customers live.
However, in a system ideal for human flourishing, laissez-faire capitalism, the issue of fairness of corporate taxes never arises—because governments don’t initiate force and collect taxes from anyone. Companies trade freely with customers, employees, suppliers, by mutual consent for mutual benefit. In the case of disputes among trading partners or violation of others’ rights, governments must fulfill their proper role: the protection of individual rights (to life, liberty, property, and the pursuit of happiness) against the initiation of physical force and fraud, through the law courts, the police and the military.
Under capitalism, everyone can be as productive as their ability and ambition allows, leading to more prosperity to all and more wealth also for private charity to the very small minority who cannot produce and take care of itself. Rather than complaining about ‘unfairly’ low corporate taxes paid by Apple and others, we would be better off advocating low, and eventually no, corporate taxes, more wealth creation, strong protection of individual rights by governments–and capitalism.