Apple is in the news for its creativity again, but unfortunately for creative tax avoidance. Most of our tax laws were written before the digital age. A software application, unlike a car, can be downloaded from almost anywhere, making it more difficult to identify where a company selling the product resides.
Selling digital products also usually generates high profits with fewer employees. As I noted in The Software Society, Apple had about 70,000 employees worldwide in 2012, and the company was running at a revenue rate of about $40 billion (€30.9 billion) per quarter.
With about the same revenue, GM had about 200,000 employees worldwide. This translates to 1.8 employees per million dollars of revenue for Apple and 5.0 employees per million dollars for GM. GM required almost three times as many employees as Apple to generate a million in revenue.
As I noted in The Software Society and an earlier post in this blog, companies are replacing employees through full automation rather than improving productivity through innovations that make employees more productive and generate well-paying jobs. I proposed an “automation tax” that is designed to encourage hiring people rather than computers.
Let me describe the principles of the automation tax briefly (with the caveat that it is discussed and justified in much more detail in the book). The tax is based on the revenue of a company in the country and the number of employees of the company in the country in which those revenues are generated. (Apple claimed in a statement that it “does not move any taxable revenue from sales to US customers to other jurisdictions in order to avoid US taxation.”)
The tax is higher for a company that uses a lower number of employees to generate a million in revenues than one that uses more employees to do so. Employees come with costs like payroll taxes and medical insurance, and the automation tax could be considered a penalty for “hiring computers” that makes that choice less attractive.
The tax can be revenue-neutral, in that the companies with more employees per million in revenue could get a tax credit, while those at the other end of the spectrum pay more taxes. However, I believe that corporate taxes should be higher, so I would prefer that the tax generate additional government revenue to avoid the need to raise individual taxes.
An article on the Apple tax situation in the New York Times noted that, in 2011, individual income taxes contributed $1.1 trillion to federal coffers, while corporate taxes were only $181 billion. Much of the cash from highly profitable companies like Apple is otherwise simply parked and generates little economic growth.
Most criticisms I’ve heard of my proposed automation tax simply say it’s not going to happen given the present political situation, largely because passing a new tax isn’t likely, whatever the purpose. Perhaps the clear need for tax reform created by the Apple controversy will make a logical discussion of alternatives more feasible.
William Meisel is an industry analyst and executive director of the Applied Voice Input Output Society (AVIOS). This article originally appeared on The Software Society blog.