Corporate Tax Planning and Public Perception

Information has recently come out that Apple, despite at least $74 billion in profit over the past four years, has not paid any corporate tax.  Tim Cook is being grilled by the Senate on this topic and it seems to be reopening the issue of the morality of corporate tax planning.

First, what is corporate tax?  In the U.S. there is no value-added tax as there is in many other countries.  There is, however, a corporate tax that is consistently one of the highest in the entire world.  Corporate tax is simply a tax that corporations pay on profits made in the United States (the situation is more complicated when profits are made in other countries).  When these earnings are returned to shareholders as dividends, they are taxed again at the dividend rate.  This double-taxation is confusing and is why prominent wealthy citizens that generate the majority of their income through the stock market are often seen as paying extremely low tax rates, since the corporate taxation and dividend taxation occur separately.

So what is the "fair" amount of corporate tax for a corporation to pay?  If a corporation wants to maximize profits returned to its shareholders or reinvested into the company, shouldn't all companies strive to pay as little corporate tax as legally allowable?  This question is extremely tricky and raises a number of issues:

1. The morality of paying taxes to the government.  There is a definite split, at least in the U.S., on whether government tax revenue is beneficial to society as a whole.  Let's take the extreme views of each side.  One side believes that companies that use accounting trickery to avoid paying taxes are devious opportunists that are extracting all value from society without giving anything back, to the detriment of the working men and women.  The other side believes that, when these corporations obey the law, they are simply generating the maximum after-tax profits that they can and then using these profits in a more efficient way to produce growth than a wasteful government could anyway.
2. The use of net operating losses (NOLs).  When a company incurs a net loss in a given year, it is often able to use these losses to offset profits in subsequent years.  In this way, a company could make an exorbitant profit one year and pay no tax.  Not only is this prudent for companies to do, it is the intentional result of NOL carryover policy.
3. The public image of taxation.  It is no secret that paying very low taxes on very high profits can result in negative media coverage, even when these effective tax rates are the result of NOLs.  In fact, Starbucks recently paid a voluntary tax in the UK, presumably entirely to improve a brand that had been hurt in media coverage of their low tax bill.  In this way, paying taxes could be seen as an expense for the marketing department.  Reconciling this with shareholders exerting pressure for higher profits is a fine line that companies engaging in this practice must walk.

As with most complicated questions, there are a valid arguments on both sides.  In general, I personally believe companies are right to try and minimize their tax bill within reason, particularly publicly-traded companies that have to release this information in earnings reports.  I believe that a simplified tax code that lowers rates and eliminates loopholes generates a more level playing field between small and large companies.  Of course, what is "within reason" for one person may not be for the next, and virtually everyone (except accountants and tax attorneys) is, at least ostensibly, in favor of a more simplified tax code.  One thing is for sure: if Apple is trying to make the argument that it reduces its tax liability in order to have more money available for growth, it is certainly not helping its case by sitting on $145 billion.