Apple Sidestepping Taxes and Pursuing Excellence in Tax Avoidance

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 In this story from the New York Times it is reported (or really whined about) how little Apple pays in taxes. The story starts off by talking about how Apple put an office in Reno to side step paying higher California taxes. Technology companies in general can move their headquarters to different states or around the world more easily than manufacturing companies due to the fact that making software, applications, or intellectual property doesn't require billions of dollars of capital investment in property, plant, and equipment.

Apple paid $3.3 billion and had a profit of a little more than $34 billion which makes their effective tax rate less than 10%. One technique that Apple uses to reduce their taxes is what is known as the double Irish arrangement. This is part of a tax avoidance by placing intellectual property outside the United States and without paying U.S. taxes. The money from the intellectual property is licensed from an outside company from Apple that is located in Ireland, and licenses the rights to a second company also owned by Apple that is also located in Ireland. The second company gets income and taxed at a low rate and avoids being taxed at high U.S. rates. It important to know that tax avoidance is perfectly legal and different from tax evasion which is where someone purposely goes out of their way not to report income, defraud the IRS, or essentially never intending to pay their taxes. Apple should be commended on such accounting excellence. Also Apple is not the only company that takes advantage of this. Eli Lilly, Google, Microsoft, and even Pfizer use the same strategy to lower their taxes. I would also point out that hiring the people to find these strategies is not cheap. Tax ninjas are not only expensive, but are not easy to come by. The true cost is adding in what it cost in time and money for the services of the tax ninjas.

I love how the New York Times tries to vilify Apple for not only pay their taxes but to suggest that companies like Apple are the reason why states of California are now facing a financial crisis. California is in crisis because of generous benefits to state employees, overspending, and high tax rates which lead not only companies but people out of the state. If California simply lived within their means and lowered state rates you would see people starting to move back.

The tax system is not only complicated at the personal level but also at the corporate level. GE filed a 57,000 page tax return. This seems ridiculous. How many hours and money was spent simply on the return? The tax code needs to be revamped at both the personal and corporate level. My suggestion would be to have a progressive tax rate at the personal level without any deductions. At the corporate level I would propose a flat 15% level. You might say “This will deprive the government of revenue!” The problem is government spends whatever it can get its hands on. I would argue that lower corporate rates would bring business back into the United States which would increase revenue which actually would be a problem since Congress would spend it. At the same time I would propose a balanced budget act. My balance budget act would be a little different. If Congress was not able to balance the budget everyone in Congress would be fired. This would make for interesting politics and ensure some accountability.  Until any of this happens companies will use all possible deductions, credits, schemes, and sandwiches to keep more of their money. 

FDA: Stifling New Cures

In this report by Avik Roy of the Manhattan Institute finds that the cost of Phase II trials is increasing the costs of drugs. Roy finds that 90% costs related to the development of a drug occur in Phase III. Roy response is to allow drugs that have passed Phase I and Phase II trials to be marketed to patients. This is something similar to what I have purposed, however I would be okay with letting drugs on the market once they have been approved from a safety standpoint. Since everyone has different body chemistry, cells, and since no two people are alike it is unwise for the FDA to make a blanket statement when they disallow certain drugs that could clearly benefit certain individuals.

The costs of drugs according to the Tufts Center for the Study of Drug Development have increased from $100 million in 1975 to $1.3 billion (in 2000 dollars). The cost even after adjusting for inflation has dramatically increased. One reason the costs have increased is because the trials have required more patients, more resources, longer trial periods, and more medical tests to be performed. In 1999 the average length of a clinical trial was 460 days. By 2005, the average increased to 780 days (or just over 2 years).

The author’s suggestion of allowing limited marketing before Phase III is a step in the right direction. I would also want to not require prescriptions for drugs. What is really interesting is why people need to waste their time to make an appointment just so a doctor could renew a prescription (think of how wasteful it is for someone to make an appointment with a dermatologist just to get face wash). If a prescription weren’t required people would still go to the doctor for medical advice. Also moving drugs from behind the counter to over the counter would dramatically drop prices since places like CVS, Walgreen's, and Wal-Mart would all have to compete with each other. The most important point however is that people along with their doctors could experiment with different drugs to see if they helped. This would allow for more information to be spread to the masses which in the long run would benefit everyone. Some people might get hurt in the short term but in this world we do face tradeoffs.

It seems puzzling that year after year the FDA increases regulation when we have more data about who we are and how we operate. Medical data has exploded in the past few decades leading doctors and patients to know more about certain conditions. In some cases now patients know more than some doctors especially if they have a certain illness. Doctors sometimes will look up symptoms during a patient’s visit to pinpoint exactly what they might have. Also with genome sequencing doctor's can look at a patient’s DNA and have a better understanding of what illnesses or diseases they may get face in the future. With all this information you would think the FDA would be regulating less. Knowledge is power and there is no question the FDA is doing more harm than good. 

Natural Orifice Surgery: Surgery of the Future?

                Something interesting I have learned about in the past week weeks I natural orifice surgery. I saw an article about a woman who had her appendix removed through her vagina. This reminded me of surgeries they use to do in ancient times. The way natural orifice surgery works is the surgeon operates on the body through natural openings such as the mouth, vagina, rectum, and urethra. By doing this the surgeon doesn’t have to cut the skin which can lead to infections and complications. Only around 1,000 patients in Europe, Britain, and America have undergone this surgery. Hopefully more people will undergo this surgery in order to see if it has benefits over traditional surgery.

                Surgeons have already used natural orifice surgery to remove prostates, kidneys, appendices, gallbladders; it can even be used to perform weight loss surgery.  Surgeon Kurt Robert of Yale University performed the first appendectomy (appendix removal) in 2008. The surgery was less than an hour and half and the woman had no visible scars. Dr. Mitchell Humphreys of the Mayo Clinic removed the prostate of one man in 2010 and so far has had no signs of complications. Dr. Vikram Reddy a assistant professor of surgery at Yale University is experimenting with natural orifice surgery for patients with Crohn's disease (gastrointestinal). One other advantage to the surgery is that there is less of a chance of the patient of hernias. There however are risks associated with this procedure like any procedure. Since there is an internal incision usually made it can cause internal leaking from the incision made on the inside of the body.

                There is no doubt natural orifice surgery is in its early stages. Hundreds if not thousands of surgeries will have to be performed in order to determine if this new type of surgery offers any benefits.  What is fascinating is how surgeons use to have to make large and long cuts to perform surgery. Then in the 1980’s and early 1990’s surgeons started doing laparoscopic surgeries. Then in the early 2000’s robotic surgery was introduced. Perhaps natural orifice surgery will take off in the next ten years. Only time will tell.

Walter E. Williams on the Decline of Morality in Society

Vintage Williams from '94...

Estate and Gift Tax 1917-2009 (Percent of Total Revenue)

First Free-Market Hospital: The Surgery Center of Oklahoma

Perhaps the only free market hospital is in Oklahoma City, Oklahoma. The Surgery Center of Oklahoma performs all different types of surgeries ranging from ear, nose, throat, general surgery, urology, ophthalmology, and various orthopedic surgeries. What is different about The Surgery Center is Oklahoma is that they don’t go through insurance companies. Let me repeat this no insurance is involved in these procedures. What is even more interesting is that the prices for all surgeries are included on the website.  By doing this the surgery center is able to not have to deal with the bureaucracy of insurance companies and able to actually charge less because of the bureaucracy. The surgery center also has an infection rate of only .3% in 2006, .04% by 2008, and in 2010 only .001% which is a fraction of the national average of 2.6% per year.

I am always curious why finding outcomes of hospitals is so hard to find. For anyone with insurance they really don’t care what the cost of a procedure is because usually there is a price ceiling on what they pay in any given year. This would be the same thing as going to the grocery store with no prices loading up on whatever you desired an then paying a fixed amount every time you visited the store (think co-pay). In this scenario, there is no incentive to care about what the cost of anything is or its benefits. Health care works the same way. We need a single-payer system of people paying out of their own pockets. A common complaint to this might be that “People can’t pay out of their own pockets because prices are too high!” People fail to realize the reason why prices are high. If the American Medical Association got rid of their cartel and let more people practice medicine, the FDA allowed patients to take drugs after they passed Phase I of clinical trials, and if prescription drugs available without prescriptions the price of health care would drop faster than you could say abracadabra. All of the things I mentioned artificially increase the price of medicine. Also getting rid of the employer deduction for health insurance and allowing individuals to decide would help. Another thing that would help is allowing people to buy health insurance in different states. Why it is illegal to buy health insurance in different state is beyond me.

The United States needs more hospitals like The Surgery Center of Oklahoma. When people have to pay with their own money they pay much closer to attention to the costs and benefits. Setting up a hospital is no easy feat due to the massive amount of regulations required to start one. I would prefer to lower to barriers to entry and allow anyone open a hospital. We want hospitals popping up like McDonalds and Wal-Marts. It would be positive to have more for profit hospitals. People might say “Well for profit hospitals have no incentive to make people better”. Organizations and businesses have reputations. If a hospital was known to make people worse no one would go there putting the hospital out of business. More for-profit hospitals would cure our quasi private/public health system. 

Personal Omics Profile: Future of Medical Testing?

Medical testing may be reaching the next frontier. Recently Michael Synder of Stanford University spent the last two years sequencing his DNA, genome, and metabolites. During the two year period, researchers used iPOP or Personal “Omics” Profile. IPOP looks at not only the genome, proteome, and other vital information. Over the course of two years Synder provided a blood sample every two months to study his body. Over the course of the study Synder got sick and researchers were able to look at the changes in his body in real time. The data showed that Synder was at an increased risk of type 2 diabates. By modifying his diet and exercising he was able to bring his vitals back into range erasing the increased risk for diabetes. In essence he was able to see a few years into the future due to the real time data. The researchers look at different metrics to see what was going on with Synder’s body.

This is the first look at medical testing in real time. The human body is complex and we have many different genes. Genes only tell us whether or not people have an increased risk of decreased risk of getting a getting illness or disease. However, by studying these genes and genome in real time researchers will be able to get a better understanding of how the body transforms over time. For instance, how a normal body gets cancer. Also this can lead to how people improve, get better, and stay healthy. Understanding this process could lead to novel therapies in the future.

I hope more studies that use the IPOP are done in the future. A better study would be to look at certain populations with a particular disease or illness and measure the changes in real time. One drawback however is the amount of testing that is required. I don’t know how many people would be willing to get a blood test every month. Hopefully, in the process researchers can devise ways to get information by less invasive means.