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Apple Inc., the US corporate parent of dozens of foreign legal entities, has been hit with a $14.6 billion tax bill by a commission of the European Union. At the heart of the commission’s complaint is an alleged antitrust violation rather than a tax dispute per se: Apple is accused of negotiating a sweetheart arrangement with Ireland, in exchange for creating thousands of new jobs there. Under the arrangement, Apple reportedly funneled millions in international profits to its Irish headquarters—where those profits were taxed at a very low rate. Therefore other EU nations where Apple has operations and/or sales suffered tax losses, due to Ireland’s unfair “competitive advantage” (i.e., lower tax rates). Or, as a bureaucrat might say, Apple receives illegal tax benefits from Ireland.

Politicians and elites viscerally hate any form of tax competition—at least for the plebes. See, for example the Organisation for Economic Cooperation and Development’s ongoing quest for “tax harmonization” among its member nations. See also the seething hatred for “offshore” tax havens, which generally are small, relatively poor island countries trying to attract banking clientele or corporate registrations. Journalist David Cay Johnston, for example—who never saw a tax he didn’t like—has wasted gallons of ink in the New York Times decrying wealthy Americans who dare to have a Cayman bank account without duly notifying Uncle Sam.

But in the end, tax competition tends to reward sensible countries and punish rapacious ones. Hence the need for supranational quasi-governance from bodies like the OECD and the European Parliament—to prevent the Irelands of the world from treating their taxpayers a bit better.

Aside from the bizarre and unworkable transfer of national sovereignty to an EU body with fuzzy tax and regulatory powers, Apple’s predicament raises questions about its hypocrisy and corporate political power generally. It's a bit rich to hear Apple CEO Tim Cook suddenly become concerned over the “sovereignty of EU member states.” Cook, after all, is an outspoken progressive who presumably favors the kind of activist international tax and regulatory bodies exemplified by EU bureaucrats. He believes in putting people—and the environment—before profits, telling climate-change deniers to “get out” of Apple stock. And he clearly subscribes to the “stakeholder” theory of corporate responsibility.

He also presumably favors distribution of income from the rich to the poor, and Apple certainly qualifies as the former: its mysterious hedge fund is awash with billions in cash. Yet Apple’s express use of offshore havens to shield income from the IRS hardly comports with the company’s image as a hip tech innovator concerned with social issues (e.g., note his criticisms of his home state of Alabama). And now the company, through a spokesman, is reduced to repeating that it “pays what it owes.” Not what it ought to owe, or an amount needed to sustain a robust safety net, or its “fair share”—just what it owes. Not very progressive sounding to me. After all, Mr. Cook, aren’t all Europeans stakeholders in Apple?

Hypocrisy aside, Apple’s dilemma raises some basic but important points about taxes—points Congress and progressives never seem to understand:

Our "worldwide" income tax system is particularly bad.

The US is one of only a handful of countries with a “worldwide” tax system. This means that US citizens, US residents, and corporations organized in the US owe taxes to the IRS based on their worldwide income, rather than only their income from US sources. The only way out of this warm embrace, at least for citizens, is outright expatriation.

Consider a Canadian born to US citizen parents, who is thus an American citizen at birth. This hypothetical Canadian—who has never set foot in the US, has no property or investments in the US, and has business dealings with anyone in the US—must file a US income tax return and pay US income taxes for life! (of course there is a credit available for foreign taxes paid, but the principle remains). This shocking reality has played a major role in transforming a US passport from one of the world’s most sought-after possessions into a tax albatross.

By contrast, most of the world (including most OECD nations) has “territorial” tax systems. In a territorial system, the UK taxes Britons only on their income from UK sources. If a Briton leaves the country, he or she is free to live and work abroad without worrying about remitting taxes home. Imagine that—the concept that a political jurisdiction should only tax activity that occurs within its borders.

US taxes create an incentive not to repatriate foreign earnings.

US companies with multinational sales and operations don’t want to hoard cash in overseas subsidiaries. On the contrary, management generally wants to repatriate foreign earnings for capex, innovation, R&D, or even (gasp) to pay dividends to shareholders.

Yet the overwhelming incentive is to leave foreign earnings in the foreign country. Despite our worldwide system, the US parent does not pay taxes on those earning until actually realized, i.e., when an actual dividend is actually paid by the subsidiary to the parent. Unlike dividends paid by domestic subsidiaries to US parents, foreign dividends generally do not qualify for a deduction.

Corporate managers are judged by the overall financial performance of the worldwide entity, and they don’t want earnings taxed three times—first in the foreign jurisdiction, then in the corporation’s US tax return, and finally in the personal income tax returns of shareholders. So usually they wait until an advantageous time—let’s say in a year when the US parent has tax losses—to repatriate foreign earnings. It’s a simple case of tax consequences driving business decisions. Deferral of taxes is the next best thing to not paying them at all.

Congress has not been entirely blind to this, but predictably chose the stick over the carrot when enacting the now infamous “Subpart F” rules (so named for their sub-position in one chapter of the Internal Revenue Code) in the early 1960s. Subpart F attempted to impose a hellishly complex anti-deferral regime on multinational corporations, but mostly managed to create huge opportunities for tax lawyers. Today, Congress is more willing to consider the carrot, in the form of a single-year tax holiday with reduced rates for repatriated dividends (as it did in 2004).

The only tax rate that matters is the effective tax rate.

The aforementioned complexity of the US tax system helps obscure a very important point: effective tax rates are the only rates that matter. Confusion over brackets and graduated marginal rates only acts as a smokescreen.

The effective tax rate for a corporation may be defined as taxes actually paid divided by pre-tax earnings (roughly, gross revenue less allowable deductions). Effective tax rates—not statutory rates—are what company managers really focus on. So while the US corporate tax rate is among the highest in the world at 35%, that percentage is due only on income above a certain amount. And if a particular company or industry has effective lobbyists, favored tax deductions can drive effective tax rates well below 15%.

Arguing over rates and deductions only distracts us from focusing on the real picture: the overall cost of compliance, including the taxes paid, the opportunity costs, and the business decisions altered. Taxes are the price we pay for a very uncivilized, grasping, and war-prone federal leviathan.

Jeff Deist is president of the Mises Institute. He previously worked as a longtime advisor and chief of staff to Congressman Ron Paul. Contact: email; twitter.