Tim Cook, Apple chief executive, last month made a tax pledge that caused a frisson among analysts. No, this was not about Irish or European tax; instead, speaking on American television, Mr Cook promised that the technology group would repatriate some of the $200bn of cash that it stores overseas - if there was a “reasonable” US tax rate.
Initially this seemed like mere posturing. After all, American companies such as Apple have complained for years that the US tax regime deters repatriation. But now Mr Cook’s pledge has taken on new life. Margrethe Vestager, EU competition chief, last week accused Apple of underpaying €13bn of tax in Ireland. Mr Cook dismissed the ruling as “total political crap”. But in an attempt to rebuff Brussels, he has suggested that “repatriation [will] occur next year”; Apple has apparently set aside “several billion dollars” to pay the American tax.
Investors and US political pundits should take note. Mr Cook’s comment will certainly not placate Ms Vestager, nor will it calm the controversy in Dublin. But it could accelerate a shift under way in Washington in the corporate tax debate.
It is likely that Apple’s pledge could help to define the policy platform of the next president, as discontent over US companies seeking to escape the American tax net is one of the few themes that unites both the campaigns of Donald Trump and Hillary Clinton.
As the candidates seek to find plausible growth-boosting ideas, Mr Trump is mooting the idea of a one-off tax break to encourage companies to bring cash home. Nobody quite agrees on what might constitute a “fair” rate. Mr Trump appears to favour a memorable round number like 10 per cent, instead of the usual rate of 35 per cent.
However, Tom Barrack, his economic adviser, told the Financial Times that he would prefer a rate of 5-7 per cent.
Other Republicans agree. Meanwhile, Democrats think that a “fair” rate would be much higher. Last year, for instance, President Barack Obama mooted a one-off 14 per cent tax on the unrepatriated foreign earnings of US companies.
But the common theme in these proposals is the idea - or hope - that one-off tax breaks should be combined with measures to encourage companies to promote US growth. One idea, for example, is that tax breaks will only be given to companies that raise employment and investment.
Another is that the Federal government should use tax revenues for infrastructure spending. A third, potentially intriguing, suggestion being floated by some Democratic party advisers is that companies should store some of their repatriated corporate cash in government-issued infrastructure bonds.
Will any of these ideas work? History offers reason to be sceptical. In 2004, the American government made an effort to encourage repatriation by offering a (supposedly) one-off tax break of 5.25 per cent if companies promised to use their repatriated cash to create jobs and investment.
That persuaded groups such as Pfizer and IBM to repatriate more than $150bn of funds. But, as a 2011 Senate report points out, the ensuing government tax boost was relatively small and there is little evidence that the companies raised investment or employment.
On the contrary, the biggest 19 reduced their US headcount by 20,000 in the following three years, the Senate report suggests, and much of the money went to shareholder dividends and stock buybacks. Of course, giving money to shareholders is not necessarily a bad thing.
But, if nothing else, the 2004 experience suggests that it is a mistake for government to think it can micromanage corporate spending. As soon as the tax breaks ended, companies rebuilt their overseas cash piles.
Perhaps politicians could learn from their mistakes this time. If funds were channelled into infrastructure bonds, for example, there might be more of an impact on the wider economy. And if policymakers admitted up front that tax breaks are unlikely by themselves to solve the jobs problem, expectations would be more manageable.
But the most important lesson from 2004 is the most obvious: although moves to repatriate cash can be useful, they will only deliver lasting benefits if there is wider reform that reduces the incentive for companies to arbitrage differences between national tax codes.
Sadly, there is little sign that politicians in Washington (or Brussels) are about to deliver that. Until they do, tax breaks will remain more of a gimmick than economic policy, just like Ms Vestager’s €13bn tax threat.
