On Monday, Congressional investigators revealed that Apple has side-stepped billions of dollars in U.S taxes "through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen." Nevertheless, Tuesday's hearing before the Senate Permanent Subcommittee on Investigations turned into an Apple love fest, with CEO Timothy Cook insisting to little opposition, "We pay all the taxes we owe - every single dollar."
Of course, if that line sounds hauntingly familiar, it should. After all, throughout the 2012 presidential campaign, private equity innovator turned GOP nominee Mitt Romney repeatedly declared, "I pay all the taxes that are legally required and not a dollar more." As it turns out, both Apple and Romney used the same advantage in the tax code--the public subsidy that is the corporate debt interest deduction--to keep their profits high and their payments to Uncle Sam very, very low.
On its face, there is sadly nothing illegal or particularly unusual in Apple's labyrinthine structure of overseas tax havens and mystical subsidiaries. In February, Venture Beat reported that 50 tech companies including Apple, Microsoft and Google used similar tactics to dodge an estimated $225 billion in taxes. Still, the sheer scope of Apple's tax avoidance operation is staggering. As the New York Times explained:

Over all, Apple's tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said. That cash remains offshore, but Apple, which paid more than $6 billion in taxes in the United States last year on its American operations, could still have to pay federal taxes on it if the company were to return the money to its coffers in the United States.

All told, over two-thirds of Apple's $145 billion in cash is located overseas. But despite sitting on that mountain of cash, Apple is instead borrowing money to pay for the $100 billion in dividend payments and stock buybacks its plans by the end of 2015. The main reason Felix Salmon explained, was to avoid the 35 percent U.S. corporate tax rate which would apply to repatriating overseas cash, thus helping Apple avoid a tax hit of up to $35 billion. Last month, Apple held its initial $17 billion bond offering, a strategy which will save the iPhone giant roughly $9.2 billion in taxes.
But Apple isn't just reaping a massive tax savings windfall by not using its overseas cash to pay its shareholders. Unlike in many other industrialized nations, in the U.S. interest on corporate debt is fully tax-deductible. As the Financial Times summed up the process, it's not just today's low interest rates which make taking on billions in new debt so attractive to Apple and other firms:

The company will also save around $100m a year from using the debt rather than straight cash. Although the company's $17bn borrowing from the corporate bond market this week will cost it around $310m a year in interest payments, it will regain about a third of that due to tax deductions.
There is a huge tax saving for Apple in borrowing the money rather than bringing it back to the US," said Kevin Phillips, international tax partner at Baker Tilly. "The company will keep getting that $100m or so tax credit every single year."

Along with the carried interest tax exemption, it is precisely that tax break from Uncle Sam that made the private equity industry pioneered by firms like Mitt Romney's Bain Capital possible.
As the history shows, on his road to becoming a $250 million captain of private equity at Bain Capital, Mitt Romney had a lot of help from his uncle. Uncle Sam, that is. Writing in Rolling Stone, Matt Taibbi explained how:

Essentially, Romney got rich in a business that couldn't exist without a perverse tax break, and he got to keep double his earnings because of another loophole - a pair of bureaucratic accidents that have not only teamed up to threaten us with a Mitt Romney presidency but that make future Romneys far more likely. "Those two tax rules distort the economics of private equity investments, making them much more lucrative than they should be," says Rebecca Wilkins, senior counsel at the Center for Tax Justice. "So we get more of that activity than the market would support on its own."

Then-Bain Capital CEO Mitt Romney concluded as much when he acknowledged, "There's a lot greater risk in a startup than there is in acquiring an existing company." So he fatefully redirected his firm from venture investments in new companies like Staples and instead became a leveraged buyout king. To understand both why he did that and how all American taxpayers helped make it possible, a little background is in order.
Private equity owes its success in no small part to that uniquely American provision of the corporate tax code. The New York Times recently helped explain why:

Companies can finance investment from either debt or equity. Companies can finance investment from either debt or equity. But profit on an investment financed with equity -- stock issued by the company -- is taxed. In contrast, if the project is financed with debt, then only the profit after interest payments are made is taxed. This means debt-financed investments are cheaper than equity.

And not just a little cheaper. As the Treasury Department recently explained, "The effective corporate marginal tax rate on new equity-financed investment in equipment is 37 percent in the United States. At the same time, the effective marginal tax rate on the same investment made with debt financing is minus 60 percent--a gap of 97 percentage points." The result:

This creates a bias by corporations toward debt.

Or, for the likes of Mitt Romney, a business model.
"In the majority of these deals," Lynn Turner, former chief accountant of the Securities and Exchange Commission explained, "the tax deduction has a big enough impact on the bottom line that the takeover wouldn't work without it." And that interest," Turner said, "just sucks the profit out of the company." As Taibbi rightly noted, "You almost have to start firing people immediately just to get your costs down to a manageable level."
That's one important reason why other countries like Denmark, the UK and Germany either don't offer--or are trying to limit--the "public subsidy" that William D. Cohan deemed "the mother's milk of a leveraged buyout". As Felix Salmon noted, the United States could lower the rate at which debt interest can deducted or cap the amount of debt to which it applies. (The Obama administration is considering those kinds of changes in its recently proposed "Framework for Business Tax Reform.") In its January 30, 2012 editorial, the Financial Times lamented:

"The system could be made fairer and more efficient by taxing debt and equity at the same rate...Most of [Romney's] money was made at Bain Capital, which, like all private equity groups, benefits from a federal debt subsidy. It should be eliminated."

Eliminating or at least reducing the rate at which corporate tax debt can be deducted or putting a ceiling on the amount of debt firms can take on while still benefitting from the deduction seems like a common sense reform. Otherwise, the iRomney will become a permanent fixture of the business model for Apple and many other American corporations.