There is something fairly ridiculous about a company like Apple going out and borrowing $6.5 billion by issuing bonds. They have, after all, just announced the largest quarterly profit of any company anywhen or where and have a cash pile of $170 billion and counting, So why on earth would they go out to borrow in the markets? Much of their “cash” is actually in things like short term Treasury bonds (T-bills in fact, under one year maturity, notes are one to 10, bonds longer than that) and those will yield less than Apple will have to pay on the bonds it is issuing. The reason it’s doing so is the tax system: and that’s what President Obama is trying to sort out with his suggestion in his budget proposals. Now, I think that Obama’s got his proposed solution wrong but that’s just me: that there should be some change to deal with this situation is something of a no-brainer.
Apple has revealed plans to borrow billions, despite its recently confirmed status as the most profitable public company in history and its cash reserves of $178bn (£118bn).
The bond sale was revealed in a regulatory submission on Monday. It comes after Apple said last week that soaring sales of the latest iPhone models, especially in China, boosted its quarterly profits to $18bn.
Apple has previously used the proceeds of bond sales to fund share buybacks and appease investors such as the activist Carl Icahn who want to see it return more of its vast wealth to them. It borrowed $17bn in 2013 and sold €2.8bn (£2.1bn) in bonds on the European markets in November last year.
Apple was initially looking to raise $5bn in its new Wall Street bond sale, but boosted this to $6.5bn, Bloomberg reported, citing an anonymous source.
The background is that profits that Apple makes outside the U.S. tend to end up paying very low corporation tax payments. Older Apple accounts show that this rate is around 2%. The aim and point of a company is of course to enrich the stockholders, but in order to get that money to said stockholders Apple must “repatriate” it, bring it back into the U.S. At which point the American tax system asks for a 35% corporate income tax, minus whatever foreign taxes have already been paid. The incentive is there, an incentive of 33% of the money, for Apple not to bring those profits back. Instead, they go and borrow money in the U.S .(and everyone’s happy to lend because they know they do have that $170 billion and counting cash pile) which they can then use to enrich their shareholders through stock buybacks and dividend payments.
It’s all a bit of a kludge really and a more sensible tax system would solve this. One of two things should happen. Either those foreign profits are taxed in the U.S. whether or not they are repatriated or those foreign profits should not be taxed even if they are repatriated. Either solution gets to the goal, of allowing those profits to be distributed to shareholders, the aim and point of the entire game.
Obama has suggested that those profits should be taxed whether they are repatriated or not. A 14% charge on those already sitting around enjoying the sun in places like Bermuda, and a minimum of 19% US corporate income tax minus whatever has been paid to foreign governments for any future ones. Now this works, in that it solves the primary problem, unlocking that cash to the benefit of the U.S. domestic economy. On the other hand it’s difficult to see the moral justification here. If Apple manufactures in China and sells in Germany, making a profit, then why should Uncle Sam have a share of it?
The other solution is to simply announce that foreign made profits are not taxable in the U.S. Bring them back and distribute them how you like. Sure, Uncle Sam still needs money to operate (perhaps not quite as much as he takes now but that’s another argument) but note what happens. Those stock buybacks trigger capital gains tax bills and a dividend payment triggers dividend taxation. Uncle Sam still gets cash but just at a different stage of the chain. And, if we’re honest about it, that’s almost certainly the right part of the chain to be paying the taxes. The incidence is already upon those investors anyway, as the corporate income tax reduces their returns, remove that and their returns rise. That increase in returns then gets taxed at the individual level. But more than that the right people to be paying for the expenses of the American government are the American citizenry. And richer people probably should be paying higher rates than poorer ones and so taxing dividends and capital gains is a reasonable enough way to achieve that goal.
I would in fact argue that the corporate income tax should be abolished in its entirety and simply put the dividend tax rate up to the same marginal rate as normal labor income (not quite right economically but possibly politically acceptable) and do the same for capital gains with a reasonable inflation adjustment. Sadly, that’s not the way Obama seems to want to go but at least the issue is now being seriously discussed as a result of the President’s budget proposals.
My latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.
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