“Unbelievable Chutzpah” or Brilliant Innovation?

Clearly the guys at Apple, talented at developing amazing products based on brilliant technological innovations, are also busy innovating in other ways, and that tells us a lot about how dysfunctional our financial system has become.

First came the news that the company was sitting on billions of dollars of profit, unsure what to do with it. More recently came the astounding news of its success in escaping taxes.

In the old days of traditional capitalism, new businesses sold shares to investors who thus became owners. In return, the shareholder-owners would get dividends, and with luck and good management the shares might also increase in value. That concept became obsolete when investors got interested in the far greater returns that could be gotten from flipping the shares. Companies then got interested in driving up the value of their shares, less interested in providing a reasonable and secure rate of return. The profitability of a company became less important than its ability to “increase shareholder value,” as that strategy became known — and in fact many companies stopped bothering to pay dividends at all. They wanted to raise “value.”

That’s how Apple’s ballooning nest egg of $145 billion came about. But then their shares did not continue to go up. What were they going to do with all that money? And how could they stimulate an increase in share prices? The ingenious solution was to borrow money to pay dividends. The problem with just paying out the money they already had was that then they’d have to pay taxes on it first. And the borrowed moneycould be used to buy back shares, and that too would bolster their price.

As noted in The New York Times: “About two-thirds of Apple’s cash about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, it could have significant tax consequences for the company.” In other words, they would have to pay taxes.

That takes us to the tax problem: Thanks to what lawmakers called “gimmicks” and “schemes,” Apple was able to largely sidestep taxes on tens of billions of dollars. “Over all, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said.” But they “have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes.”

As one economist put it: “They have been so successful with their tax planning that they’ve created a new problem,” (See, “To Satisfy Its Investors, Cash-Rich Apple Borrows Money.”)

Edward Kleinbard, a former staff director at the Congressional Joint Committee on Taxation, said: “There is a technical term economists like to use for behavior like this. ‘Unbelievable chutzpah.’”

On Capitol Hill Monday, legislators made plain their fury over what they called Apple’s “egregious” and “outrageous” conduct. But after they vented their frustration and were assured that Apple had not broken any law, they calmed down and praised the company for doing such a great job. (See, “Apple’s Web of Tax Shelters Saved It Billions, Panel Finds.”)

It turned out that the Senators had no one to blame but themselves for having created those rules. As Tim Cook, Apple’s CEO, put it: “Apple pays all the taxes we owe – every single dollar.”