Don't Rip Apple for Dodging Taxes: U.S. Tax Code Needs to be Fixed Immediately

On Sunday, the New York Times featured how Apple sidesteps billions in taxes by routing its profits to low-tax regions, such as Nevada and Ireland. By minimizing their tax liability, Apple's management team is keeping expenses as low as they legally can. (Apple has since issued a response.)

Don't blame the player — blame the game. Apple is doing this according to the rules of the tax code.  Companies can do this because the tax code is a morass of loopholes and special exemptions. We wouldn't have these problems if the government  tax code that were low, broad, neutral, and simple.

Apple is getting heat for tax limitation because it has deep pockets and a small tax bill. This is nothing new — last year, GE was criticized for doing the same. This is just like how the government is targeting rich people to pay their "fair share" (e.g., the Obama administration is supporting the Buffett rule, state governments are proposing to hike taxes on millionaires).  

By vilifying Apple, the New York Times article misses the point: The U.S. tax code needs serious reform. 

First, it's out of date — taxing tech companies is difficult under the current code because they're not tied to a location like traditional brick and mortar companies are. 

Second, it has too many loopholes that let companies with creative accountants avoid taxes.

(Additionally, the New York Times article overlooks the fact that Apple recently tilted the playing field in its favor by securing a $21 million handout from the Texas state government. I recently discussed on PolicyMic that this is bad tax policy.)

The case with Apple shows that tax competitiveness is important to regional economies. Regions that have a low income tax would see more economic growth and job creation if they reduced their tax burden. (Indeed, taxes are precisely why Apple shifted some of its operations from high-tax California to no-tax Nevada.) 

California policymakers could fix this problem easily — all they have to do is lower their income tax. When you tax something, you gets less of it — including corporate profits and rich people.

Apple is not the only company to leave California, nor is it the first; the state is consistently losing business to lower-tax regions. According to IRS migration data, between 2004 and 2010, California has lost over 1.5 million tax returns and over $79 billion in Aggregate Adjusted Gross Income to other states.

Drilling further into the data, it turns out that residents are fleeing for lower-tax states — they're going to Texas, Arizona, Nevada, Washington, and Oregon (in that order). Interestingly, 3 of the top 5 states assess no personal income tax. This is unlikely to be a coincidence.