Unlike the US tax code, Apple is perfectly rational

“Apple’s decision last week to issue $17bn in bonds has drawn attention to America’s abominable corporate tax system,” Aswath Damodaran writes for The Financial Times. “The tech giant’s first debt issue comes at a time when it has more than $100bn in cash held outside the US. By borrowing from the capital markets, Apple can pay dividends to shareholders more cheaply than if it used the money stored outside the country, while getting a tax deduction for interest expenses.”

“This decision has angered those who like to inveigh against ‘tax avoidance’ and ‘corporate greed,'” Damodaran writes. “But the culprit is not Apple; it is the over-complex US tax system. Apple’s actions can be explained by two features of the tax code: its treatment of foreign income and its bias towards debt over equity.”

Damodaran writes, “How do you fix the problem? There are those who believe that it is the patriotic duty of every US corporation to maximise taxes paid, a belief that is in conflict with a company’s fiduciary duty to its shareholders, many of whom may not share this belief. Indeed, many are foreign investors. To those with a punitive bent, the solution is to tax all income at US tax rates, irrespective of whether it is returned to the US or not. While that may appeal to egalitarian impulses, it will force US-based global companies to pay a large price to remain based in the US. Many will choose to leave. Another solution is to lower the US corporate tax rate towards that of other large economies and not tax foreign income as US income. This suggestion will attract populist anger but may actually result in more taxes being collected and greater investment in the US.”

Read more in the full article here.

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Apple’s massive $100 billion capital return program is a perfect tax arbitrage – April 26, 2013
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  1. Most of the power on Capitol Hill comes from carving out exemptions, exceptions or exclusions from the tax code. The members of Congress have no desire to simplify the code as that would undermine the power they hold and the source of their funding.

  2. Unlike corporations, 100% of PERSONAL income is taxed no matter where earned or gotten and no matter it is is repatriated or kept outside of the USA. Outrageous. The ONLY major country in the world that does that. How this country can justify treatment of corporate vs personal income with such a blatant contradiction is beyond human understanding. Tax them both the same way or not at all.

    1. I am paying income tax to the US Government on the dividends on my Apple stock.
      As for “the ONLY country in the world” claim, tell us, do! About how you came to memorize the entire tax code of every country on the planet. Or do you just make things up?

      1. It’s true. The US is the only country to tax people living outside the US.
        While supposed to close loopholes for tax-evaders, the practice leads to “average” US citizens (students, housewifes) being unable to actually open an account in some foreign countries because the accompanying legislation (FACTA, FBAR) means a lot of paperwork for the banks – so most just refuse US customers.
        As a result, people are rather handing in their US passport than going through all that hassle.
        In most parts of Europe, if you can’t open a bank account, you simply can’t exist. Even as a student, you need one.
        Go to Wikipedia and look up FACTA and FBAR – if every country did this, it would be a nightmare.
        Somebody joked that if Kenia had the same legislation a case could be made for President Obama being subject to Kenian tax – for the whole US budget (because of the way FACTA is worded).
        As for the article – the reason this works is that interest rates are too low. Interest rates should be higher, then companies wouldn’t just issue bonds rather than paying taxes!

    1. Why? So that consumers can choose between efficient corporations and the deadbeat corporations that make no effort to run an efficient operation, but merely pass on all costs to consumers.

      No taxation = no skin in the game. And yes, to pre-empt the political dialogue that inevitably will follow, everyone already pays taxes of some kind. The problem is that incessant corporate lobbying has shifted tax burden from corporations (which, yes, passed on the costs to individuals) to a federal income tax scheme that primarily hits the working class. Thanks to corporate compensation manipulation — that is, salaries hundreds of times greater than professional employees plus insane amounts of company stock handed to them by their buddies on the compensation committee. Today corporate/feudal lords are so rich that their financial managers have to find places to hide all the money — and ensure their tax rate is nowhere near nominal published tax rates.

      Tax policy would be dramatically improved if income tax was phased out entirely and instead entirely replaced by:

      1) corporate taxes on cash flow, not on profits; add tariffs or penalties to offset unfair trade practices or incentivize fair trade. Yes, much of this would be passed on to the consumer, just as today. But wisely applied tariffs would penalize firms that support slave labor or other unethical business practices. Cash flow is a simple line item that cannot be manipulated to the extent that the profit statement is in today’s global capitalistic greed game.
      2) natural resource consumption taxes (i.e., utility & fuel taxes). needs no explanation – much simpler for the IRS to measure and tax than income.
      3) emissions/waste taxes (i.e., sewer, air emissions). Only slightly more complicated to implement than resource use tax, but certainly less manpower-intensive than the current IRS.

      The above tax scheme would not penalize one’s income, but rather reward efficient companies and individuals. Isn’t that what we want — a world where it is encouraged to be productive instead of wasteful? But why does the USA stick with the income tax? Simple: its what corporations want; to shift the burden of US infrastucture maintenance on the working class. And wall street, in its infinite speculative greed, needs to be taxed on every trade transaction. This nonproductive work is already under-taxed as “capital gains” while the working class pays ~ twice the tax rate at about 1/10 the salary of a hedge fund manager.

  3. I think it is fair that corporations pay some level of tax on foreign earned income (after deducting foreign taxes). After all, they gain the benefit of the use of our currency, the military makes the world reasonably stable for them to operate in, we enforce patents and trademarks, embassies all over the world provide various services to businesses, etc. The rate maybe should be less than it is domestically but it should not be zero.

  4. Whatever you want less of you tax.

    Capital is like a river, it flows the path of least resistance.

    Taxing cash flow won’t work. If your business is truly operating at a loss or with thin margins, a tax would make your business unprofitable – exactly the opposite of what you want.

    Either a sales tax, import tax, or flat income tax. Since most lobbying efforts are for tax carve outs, having a flat system treats everyone the same. Get the government of trying to pick losers and winners.

    1. After reading your posts, I’d like to suggest that you move to Somalia. There’s no government there to speak of and essentially no tax — you’d most likely be much happier!

  5. Are you kidding? This whole article is rife with ignorance. The corporate tax structure in the US is designed to increase foreign investment of US companies outside the US which will, in turn, do two things: increase reliance on American banks to fund, for example, $17 billion in borrowing and create more demand for US products abroad. And VERY few large US corporations pay the marginal tax rate on their profits, including Apple. What I find stunning is that American corporations are protected by the world’s most powerful military, are subsidized by welfare and entitlements (ask Apple how many people that get government money of some sort own Apple products bought at Target, Walmart, etc.) or by government purchasing YET they don’t want to pay the “dues” for being part of that club. American corporate profits are at record levels under President Obama and effective taxes amongst historic lows. The whining and “I’m a corporate victim” hue and cry needs to stop. And the banks are thrilled to make millions off Apple’s debt issue. And Apple will ake fortune shorting their own stock! Boo-hoo! I love Apple but folks, this is a HUGE profit-generating move. Buy AAPL NOW!

  6. I think the most unfair tax is property tax. Once you own something, you have to keep paying the government to keep owning it. It’s like paying rent – for something you already own.

    1. The most unfair tax is the income tax. Property is something one has managed to thus not offer someone else, including the state, whereas income is singularly personal. The fairest taxes are use taxes, such as road taxes.

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