Apple AAPL, -2.67% is a tax dodger. A cheat. Among the “biggest tax avoiders” in America. A company using “gimmicks” and “the Holy Grail of tax avoidance” in order to deprive the U.S. taxpayers of billions in revenue.
So, at least, said U.S. senators this week. They grilled Apple honcho Tim Cook for hours. The media were happy to go along.
Apple tax case is toxic political issue
A Senate hearing on Apple’s international tax structure has become a toxic political issue in the U.S. and U.K.
Bah. What a con this is. What a crock.
It takes a lot to find me in agreement with Rand Paul, the right-wing senator from Kentucky. But in this case I’ll make an exception. Senator Paul scathingly observed that Apple’s critics, including the senators on Capitol Hill, do everything they can to minimize their own taxes.
You could also point out that Apple provides an enormous amount of revenue for the IRS, through corporate income tax, payroll taxes and the taxable income it pays to employees.
But that’s not the half of it. Forget this nonsense about Apple somehow cheating the IRS out of trillions. The truth is very different. The real cheat is the corporate income tax itself.
Everyone has this tax wrong. Conservatives. Liberals. Tax experts.
Truth is, it is far and away the worst tax in America. It’s nuts. It’s hurting America. And it should be scrapped tomorrow.
Why? Let me count the ways.
1. The corporate tax is regressive.
Imagine a big company that makes $100 billion in pretax profits, equal to $100 for every share. It pays a marginal corporate income tax rate of 35%, or $35 per share.
Your grandma sitting on her rocking chair in Dubuque, Iowa, owns some of that stock in her index fund. How much tax is levied on her share of those profits? Thirty-five percent, or $35 per share.
Meanwhile Daddy Warbucks is sitting on his yacht, lighting his cigar with a $100 bill. He also owns stock in the company — a lot of stock. How much tax is levied on his share of the profits? Er... 35%, or $35 per share.
Yes, really. And this is the tax that liberals are pounding the table to defend. Huh?
Corporations are legal fictions. They do not really exist (despite the fantasies of the Roberts Supreme Court on campaign finance). Saying you are taxing a “corporation” makes no sense. Ultimately that money must come from somebody or -bodies. Tax the executives or tax the stockholders.
Naturally Daddy Warbucks owns a lot more shares than your grandma, and so he’s paying more tax overall. But that’s true of any flat tax system. We still consider them regressive.
Apple made $56 billion in pretax profits last year. The accounts show $14 billion in income tax provisions. That’s about $15 per share.
Your grandma’s corporation tax? About $15 per share. The tax paid by the estate of Steve Jobs? Oh, $15 a share.
Oftentimes, Grandma is unaware of the tax she is effectively paying, because it is paid “by the corporation.” But it reduces her share of the profits. Otherwise those profits would be paid out in dividends, or they would increase the net worth of her stock. It may be hidden, but it is a real cost.
The sensible approach is to tax the stockholders themselves. You could tax their share of the net income each year, or since that might create a bookkeeping headache, just tax the dividends and capital gains when they receive them, as we currently do. While we’re about it, end the favorable tax treatment of capital gains and dividends. Treat them as income, taxed at progressive rates from 0% up to 43.4% (including the Medicare surcharge on investment income that went into effect this year).
Grandma pays 0% or 10% or 15% or whatever. The tycoon pays 43.4%. Simple, really. It’s called a progressive income tax. Democrats should read up on it sometime. (There would be an overall effect on revenues, of course, but it’s not clear how much, and within the broader context of an unbalanced budget that’s a topic for another day).
2. It encourages debt.
When I was a young consultant I remember watching with amazement as senior consultants advised CEOs to increase their corporation’s amount of debt. The reason? Their corporations could deduct the debt interest from their taxable income. In effect, Uncle Sam was paying a third of the interest.
If a U.S. company borrows money from a bank or a bondholder, the interest payments are tax deductible. But if it raises money from investors, they don’t get a comparable break.
Senators on Capitol Hill were pounding the table that Apple has subsidiaries in Ireland which pay no tax. But if Apple had run up $100 billion worth of debt, and used those tax-free coupon payments to avoid tax, I guess that would be just peachy.
Would that be the “Holy Grail of tax avoidance”? You betcha. Would the senators complain? Of course not.
Most of them have plenty of bonds in their IRAs. That’s just their right as Americans!
This isn’t just hypocrisy. It’s bad policy. We should want companies to rely more on equity and less on debt. Equity is far less risky for society as a whole, because it is more flexible.
A U.S. company going through a tough time, or which urgently needs to invest a lot of money upgrading its plant and equipment, can reduce the amount of money it gives to stockholders in any given year. But the same company cannot reduce the amount it pays to bondholders or its bankers. Debt repayments are fixed. As we saw in 2008, they make the overall system very risky.
And although the cheerleaders on Wall Street won’t tell you this, the picture is getting worse. According to the Federal Reserve, the debt levels of (non-financial) U.S. corporations have just risen to a new record high of nearly $9 trillion. They have risen by a third since 2006. It is a dangerous situation. And it is being encouraged by the corporate tax insanity.
3. It hurts the economy
Major U.S. corporations are sitting on gigantic piles of wealth which they hold offshore. A recent study by Bloomberg put the figure at just under $2 trillion.
That money was generally earned abroad, by the sale of iPhones in China and oil in France and Xboxes in Singapore. Often the products were made abroad as well as sold abroad.
Let’s bring that money home.
Repatriating that money would mean a $2 trillion boost to the economy. Move over, quantitative easing. Much of that money would go into the pockets of investors here in the U.S. and be spent or invested.
To put this in context, that’s about three times the size of the “stimulus” package in 2009, and it dwarfs the $85 billion a month the Federal Reserve is spending on bonds through quantitative easing 3. It’s the equivalent of 46 days’ extra output for the economy.
How’s that for a stimulus? How’s that for a Keynesian boost to demand?
Some critics claim that if companies bring back that money it won’t be spent on anything but “stock buybacks” or dividends. But it doesn’t actually matter. If a company spends $1 billion buying back its stock, it has to buy that stock back from somebody. The money goes into the hands of the stockholder who sells. That stockholder can then spend the money, or reinvest it in something else.
Currently, any corporation which tried to repatriate that money would be slapped with a 35% tax. We can wring our hands as much as we like. So long as that tax remains, corporations are going to keep that money offshore. They just are. It’s boring, embarrassing and stupid to watch commentators and people in public policy just go on and on and on about how one group of people, namely stockholders, should uniquely and voluntarily choose to pay extra taxes, while the rest of us don’t.
Everyone loses, except maybe the tax lawyers and the accountants.
If the senators want to encourage people to fall on their swords, they are entitled to go first. I assume they will stop taking the mortgage interest tax deduction. I assume they will stop making contributions to tax shelters like IRAs, and will take steps to wind those shelters up. I assume they will do exactly what they recommend Apple stockholders do, and volunteer to pay much higher rates of tax.
Or do you think I’m being naive?