By now investors are familiar with Apple’s decision to start paying a quarterly dividend of $2.65 a share and repurchasing $10 billion of its stock. The move was generally well received by investors. But I believe it’s a drop in the bucket for a company that generated $38 billion in cash in the past year alone.
Apple‘s (NASDAQ:AAPL) argument against shelling out more is the tax liability it faces if it repatriates any of the $65 billion in cash it now holds overseas. CFO Peter Oppenheimer said this about its dilemma: “We think the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash they have.”
U.S.-based shareholders should be embarrassed by this crass attempt by Apple and other multinationals to bully the federal government into giving it a “get out of jail free” card.
Apple chooses to do business overseas with the explicit understanding that any earnings taxed there get an equivalent credit deferring taxes on those earnings until they’re repatriated in the future, at a maximum corporate tax rate of 35%. Apple management has made a conscious decision to avoid paying those taxes — to the detriment of both everyday Americans and its own shareholders, many of whom are the richest 1% in the country.
I fail to see how this is anything but un-American.
Corporate taxes have existed at the federal level since 1909. America’s maximum corporate tax rate was higher than 35% for 46 consecutive years, from 1942 until 1988, two years after the implementation of the Tax Reform Act of 1986. In 1950, corporate taxes represented 6% of the U.S. GDP. By 2011, they were just 2.7% of GDP. It might not seem like a big difference, but corporate taxes in the 1950s accounted for almost one-third of federal revenue compared to 7.9% today.
Is it any wonder that baby boomers grew up in a post-war America brimming with economic confidence, thanks in part to a federal government that could meet its obligations and pay its bills? Might I remind Mr. Oppenheimer that in 1950, the top corporate tax rate was 42%, while the top individual tax rate was a whopping 84.4% over $400,000. Americans, especially those in the C-Suite, seem to have forgotten what sacrifice really means.
Have a look inside Apple’s most recent 10-K, and you’ll see that its effective tax rate in 2011 was 24.2% (page 63). However, that’s not what it actually paid. In reality, it cut a check for $3.3 billion (page 46), or 9.6% of its pretax income of $34.2 billion, considerably lower than the 15% it paid in 2010.
Gallingly, Apple wants to pay even less. As part of the WinAmerica lobbying group, it’s pressing President Obama to provide a tax holiday so that it and others, like Microsoft (NASDAQ:MSFT), can repatriate $1.4 trillion in cash sitting in overseas bank accounts at a one-time tax rate of 5.25%. WinAmerica argues that the $73.5 billion in taxes paid as a result of the tax holiday along with the repatriated cash would result in the creation of 2.5 million jobs.
How dumb do you think Obama is? The government tried this tactic back in 2004, and it was a colossal bust. Most of the repatriated cash back then went to dividends and share repurchases. The same thing will happen if corporations are allowed to do so in 2012. Apple shareholders will insist on it.
Columbia University’s Earth Institute published a report for the U.N. recently detailing the state of happiness in the world. Denmark was the happiest country, with Finland a close second. The U.S. came in 11th. Denmark’s corporate tax rate is a flat 25%, while the highest individual tax rate is 51.5% for a combined 76.5%. That’s 650 basis points higher than in the U.S. Yet the Danes are apparently much happier.
Ireland was No. 10 on the list, and its combined corporate/individual tax rate is 53.5% — but its corporate rate is just 12.5%. Have you looked at the state of its economy lately? Something tells me that the Laffer Curve isn’t working out so well for the Irish. Obviously, the solution is somewhere between Ireland and Denmark.
Many big corporations support the idea of a territorial taxation system in which the U.S. doesn’t attempt to tax foreign earnings and allows them to move cash wherever they like. Unfortunately, this would seriously reduce the amount of corporate taxes collected.
A better idea, according to Ed Kleinbard, a professor at USC’s Gould School of Law, is to tax U.S. corporations on their worldwide income when they earn it. Calling it a “business enterprise income tax,” it would also provide corporations with tax deductions paid to any foreign nation, but they would not be able to defer those taxes indefinitely. Pay-as-you-go taxation would level the playing field between companies like Apple with big overseas operations and those operating solely in the U.S.
While it’s easy to argue that the 35% corporate tax rate is too high, Apple and the rest of the WinAmerica lobby need to humble themselves a little bit and remember who it is that gave them their start. Asking for such a serious tax break on its hoard of cash isn’t just un-American, it’s downright wrong.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.