Apple And Donald Trump: Two Sides Of A Very Strange Coin

Many people from across the political spectrum are shaking their heads over the recent Apple tax scandal. But it is only the latest example of the corporate malfeasance and misconduct that have flourished as politicians and regulators on both sides of the Atlantic either failed to do their jobs or actively contributed to a tainted corporate culture.

Let’s connect the dots. Panama Papers…LuxLeaks…Lehman Brothers and Bear Stearns…Volkswagen emissions scandal… Parmalat fraud…Libor interest rates rigging. And now Apple — this Silicon Valley darling allegedly operating what has been called “its own untaxed Bermuda Triangle.” It has been accused of funneling its earnings through a paper headquarters in Ireland where it received illegal tax breaks. Last year Apple apparently paid a corporate income tax of just 0.005%, which means that on every €1 million in profits it paid a measly €50 in taxes — not enough to buy even a goblet of fine Waterford Crystal. The European Commission has demanded that Apple pay €14.5 billion in back taxes, which is about the size of the economies of Iceland and Cyprus.

This is a very big deal. With much-needed debate occurring about the “winners and losers of globalization,” we have re-discovered the epicenter of the earthquake that any democracy worth its reputation ignores at its peril. Globalization has unleashed a frenzy of “tax haven shopping” by the wealthy. Who doesn’t want to avoid taxes? But only wealthy special interests can afford the lawyers and the accountants who know how to hide it or shift it to low-tax countries. The problem is not just the loss of tax revenue, which depletes national treasuries and governments’ ability to provide effective services. It’s also that these scandals make a mockery of “fairness.” They contribute mightily to the perception that the system is rigged by a cozy coterie of insiders.

That in turn has fed the rise of politicians and parties like Donald Trump and Alternative für Deutschland (AfD), as well as the Brexit vote. Populist candidates and parties thrive when economic times are difficult and outcomes perceived as unfair. Average wages in the US have been flat for several decades. Following the economic collapse in 2008, the richest 10% of Americans now own three-fourths of the nation’s wealth. While corporate profits are at an all-time high, US companies have become extremely skilled at creating foreign shell companies. Besides Apple, companies such as Walmart, Microsoft, Pfizer, Google, General Electric and Exxon Mobil have stashed more than €2 trillion in untaxed profits in offshore tax havens. At the same time, these companies have enjoyed €11 trillion in federal loans, bailouts and loan guarantees. The largest companies pay an effective tax rate of less than 13 percent – lower than most middle class families. The corporate share of US federal tax revenues has declined from 33 percent in 1952 to 11 percent today. These US businesses have quit re-investing in America.

While the Apple case is stunning in its audacity, various European member states have been challenged by similar situations. A report by Oxfam International found that “the Netherlands is the undisputed European champion in facilitating corporate tax avoidance,” with only Belgium and Cyprus coming close to matching the Dutch. That same report found that Germany is missing out on significant amounts of tax income from US multinationals, which only declare 0.7 percent of their profits to the German tax authorities because they move their sales revenue earned in Germany to nearby tax havens. A few years ago The Economist estimated that an astounding $20trn in tax revenue is missing globally, which is greater than the economic output of either the US or the EU.

Fiscal black holes

These amounts of money are shocking, the economic equivalent of an astrophysical black hole.

Compared to these missing tax revenues, government attempts to replenish their treasuries by increasing individual tax rates is small-time. When US gangster Willie Sutton was asked “Why do you rob banks?” he replied, “Because that’s where the money is.” Well, this is where the money is, an international black hole. The super-charged ability of multinational corporations and mega-wealthy tycoons to pit nations’ tax policies against each other in a race to the bottom is one of the most harmful effects that globalization has unleashed. Andrew Watt of the Hans Böckler Foundation says that, with these big transnational companies able to so easily shop around for the best tax deal, the tax burden has been shifted onto non-mobile factors, especially worker’s wages. National governments are left scraping together enough funds to pay for welfare benefits that can compensate the losers of globalization.

So the Commission’s crackdown on Apple – and Ireland — is making an important stand for a different type of economics than the version that collapsed in 2008. Some say Commission president Jean-Claude Juncker is a hypocrite, since he oversaw an Irish-type tax avoidance scheme when he was prime minister and finance minister of Luxembourg – a fair criticism. But sometimes there is no more zealous reformer than a perpetrator who has seen the light. Nevertheless, critics will be watching closely to see how Juncker handles ethical conflicts by former commission members, such as past-president José Manuel Barroso and former competition commissioner Neelie Kroes.

The US reaction to the Commission’s crackdown, on the other hand, has provided a stunning illustration of the ongoing dysfunctional coziness between US businesses and their politicians. Without the Irish tax loophole, Apple would presumably be declaring its profits in the US, and contributing billions of dollars into the US Treasury, benefiting all Americans. One would think this would provide a great reason for the US to cheer the Commission’s stance.

US-EU tit-for-tat

Instead, the Obama administration is blaming those marauding Eurocrats for unfairly targeting US companies. That is truly strange and desperate, to patriotically protect a company that has offshored not only its profits but so many of its jobs. Most of Apple’s consumer products are built at sweatshops in China. Apple directly employs only around 65,000 workers in the US, which is small compared to auto companies like GM or Ford, or IBM and GE, which directly employ hundreds of thousands.

The Democratic administration’s position strongly reflects the degree to which the neoliberal, free market ideology has penetrated Washington, becoming a cozy bipartisan consensus. As much as anything, this toxic bipartisanship has provided an opening for candidates such as Donald Trump, who rejects “free trade” entirely, as well as the self-proclaimed socialist Bernie Sanders.

Hillary (and husband Bill) Clinton have very much been a part of this cozy Washington consensus. It may well cost her the election. Neither candidate has yet commented on the specifics of the Apple case, but Trump is already on record as strongly condemning Apple and other US companies for their business practices. “We’re going to get Apple to build their damn computers and things in this country instead of in other countries,” he said in an angry speech last January. Many Americans, who have watched the US lose much of its manufacturing base, strongly share this sentiment. At times, Trump also has spoken out against the perks and privileges of Wall Street and hedge fund managers – yet he praises his own tax avoidance tricks as proof of his cleverness and business savvy.

Mrs. Clinton has tried to match Trump’s populism in a carefully calculated way, proposing to levy an exit tax on companies that use these “beggar thy neighbor” business practices. But she is viewed, ironically, as having closer ties to Wall Street and tech companies than the billionaire Trump. Indeed, Apple CEO Tim Cook held a fundraiser for Mrs. Clinton recently, but declined to support Trump’s Republican presidential convention. Both candidates are unpopular among most Americans, each for their own reasons. The final month of the presidential election is going to be a roller coaster.

Following the Commission’s Apple announcement, President Barack Obama spoke in favor of international coordination of tax policies. So, regardless of the final outcome of the Apple case, the Commission’s stand may serve as a catalyst in bringing nations to the table. Having thrown down the gauntlet, the reputation of Junker and his Commission is on the line. If the Commission at some point folds its cards, that will undermine its credibility. But for now, the European Union has struck a blow for pushing globalization in the right direction. In the process, it has massively elevated the European brand. This is a battle that no self-respecting democracy can afford to lose.

This article was published in German by Die Zeit online on October 5, 2016.