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Editorial: Fix U.S. code to avoid tax dodges like Apple's

Apple chief executive Timothy Cook says the iPhone

Apple chief executive Timothy Cook says the iPhone maker has “some incredible plans,” and singled out television and wearable computing as areas of interest, during a conference in Rancho Palos Verdes, Calif. (May 21, 2013) Credit: Getty Images

Apple's startling ability to legally avoid paying taxes on billions of dollars of overseas income is a striking example of why it's imperative that Congress reform the nation's corporate tax code.

Apple Inc. chief executive Timothy Cook gave lawmakers on Capitol Hill a valuable tutorial Tuesday when he explained and defended the company's global tax dodge. It should help Congress find a way to eliminate loopholes in the tax code that the company exploited to avoid taxes on $74 billion it earned abroad since 2009. Accomplishing that in this era of multinational tech companies won't be easy.

Apple fashioned a network of overseas subsidiaries that don't fall within the taxing jurisdiction of any nation. For example, the holding company Apple Operations International Inc. -- where the company funneled income from its operations in Europe, the Middle East, India, Africa, Asia and the Pacific -- is incorporated in Ireland but managed and controlled from the United States. The arrangement put that income beyond the reach of the IRS, which only taxes companies incorporated in the United States, and also out of reach for Ireland, which only taxes companies managed and controlled in that country.

The parent company, Apple Inc., did pay the United States $6 billion in taxes in 2012, and it isn't accused of breaking any laws in its aggressive avoidance of additional tax liability. But when so much income goes untaxed, it increases the tax burden on the rest of us.

Here's one suggestion: Congress should eliminate the 35 percent U.S. corporate tax altogether. It should also scrap the preferential 20 percent rate on long-term capital gains and dividends, and instead tax that investment income the same as ordinary income, with a top rate of 39.6 percent.

That way, no matter where a company's profits are earned, when the money is distributed to shareholders in the United States, it would be taxed in a way that is both enforceable and fair.