Here’s Why the Apple Tax Problem Runs Deeper

In my tax proposal, one of the issues I address is the corporate tax rate. With all of the recent hoopla around Apple (NASDAQ:AAPL) and its worldwide payment of corporate taxes (or lack thereof), I figure this is a good opportunity to address a few issues involved with how I chose my optimal range for this particular rate within my opinion as to the optimal U.S. tax system.

This issue is not new. It is a bit disconcerting that this issue is apparently “shocking” all of a sudden. I was fortunate to study corporate taxes in general, as well as within an international context, often over the past decade regarding intellectual property-based companies such as Google (NASDAQ:GOOG). This more recent New York Times article provides a helpful explanation of a traditional tax strategy for a company like Apple.

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The continuing divide in effective tax rates between intellectual property vs. tangible property-based corporations is a reason why this issue needs to be (should have been) addressed sooner than later.

Moreover, I had the opportunity to examine the corporate tax rate issue from three particular perspectives: accounting, economics, and the law. Each discipline approaches the corporate tax issue from a different viewpoint. My synthesis of these three disciplines has led me to many conclusions as to the goals in crafting the optimal corporate tax rate. Here are a few:

  • U.S. Corporate Competitiveness within the Global Economy
  • Minimizing Distortions by Corporate Executives when Choosing on How and Where to Deploy Cash (e.g. reinvesting profits vs distributing them to shareholders, where to invest retained profits, etc.)
  • Minimize Incentive for Shareholders to Desire Corporate Form as a Tax Shelter (e.g. one reason the Accumulated Earnings Tax, or AET, was a bigger issue previously)

I am attempting to keep this post as short as possible, but one important issue to consider regarding the corporate tax rate within the entire context of my tax proposal is that it is the first layer of a two-layer tax on corporate profits.

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Although I believe there should be a corporate tax because of the third goal above, I also believe it should be relatively low in order to achieve the first goal. In addition, I have concluded that the combination of this tax and the second-layer tax (which would be the dividend tax rate or the capital gains tax rate depending on corporate and/or shareholder choices) should combine to result in a net tax burden in the vicinity of the highest marginal earned income tax rate (related to goal #2).

Jonathan Prober has specialized his academic and practical endeavors on the five pillars of professional services: finance, economics, financial accounting, taxation, and the law. His professional experience includes dealing with business and legal issues, including wealth management, financial valuation, and corporate strategy. For more, visit Prober’s Playbook or follow Jonathan on Twitter at @jonathanprober.

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