[sbov]

My spider sense is tingling - from an ignorant observer on the subject of corporate taxes, this seems wrong.

As someone who isn't 100% ignorant about taxes in general, I've noticed that there's a shitload of completely wrong information about taxes out there. It's amazing how many smart people are incredibly ignorant, and then spread that ignorance, about how taxes actually work. So I have to ask:

Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit. From my initial searching, it seems like there's something similar for corporations.

[mikeyouse]

The whole idea of 'double-taxation' is a canard. That's another topic though.

> Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit.

Any money Apple pays to foreign governments as income tax on profits is included in the calculation of their domestic tax liability. So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $300M in tax -- not the $350M that would be indicated by our 35% corporate income tax rate.

People trotting out the 'double-taxation' nonsense are promoting the idea that Apple should be able to venue-shop for an ultra-low-tax locale to claim their profits, then be free-and-clear of their US obligations.

Two more things worth mentioning:

1. The 'overseas' money typically isn't physically overseas. The money is in US banks, circulating as loans in the US economy, but is only overseas on an accounting ledger for tax purposes. This greatly blunts the potential impact of tax holidays.

2. If Apple takes out debt to fund operations purely to avoid repatriating money, the US taxpayer would then be subsidizing Apple even further. Interest on debt is a deductible expense, so that 2.5% per year Apple is paying, would be deducted from their income in the next tax year.

[AnthonyMouse]

> So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $30B in tax -- not the $35B that would be indicated by our 35% corporate income tax rate.

That's not what double taxation is. Double taxation is that both corporate income and corporate dividends are taxed. Suppose a corporation makes $10/share in profit and wants to issue it as a dividend. First they would pay corporate 35% income tax on the profit and be left with $6.50/share, then if they issued a $6.50/share dividend, the shareholders would have to pay income tax on it again and be left with only $4.225 of the original $10.

If a foreign government also extracted a cut then the money would be taxed thrice.

[mikeyouse]

This is an even sillier definition of double taxation than I was giving you credit for.

Dollars don't pay taxes, taxable entities do.

A corporation is a separate legal entity that serves as the tax base. If it makes an income, it will pay a tax on that income.

An individual is also a separate legal entity that serves as a tax base. If a corporation pays an individual dividends, then the individual will pay tax on the capital gains from their investment.

How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!

edit: GWU PhD Law Professor spells it out better than I could: http://writ.lp.findlaw.com/buchanan/20030220.html

[AnthonyMouse]

> edit: GWU PhD Law Professor spells it out better than I could: http://writ.lp.findlaw.com/buchanan/20030220.html

The crux of his argument is this:

> "Would you rather pay 10% income tax twice a year, or 50% income tax once a year?"

But that obviously misses the point. The problem with double taxation is that it makes the rate misleading. If you've lost 35% to corporate income tax and then 15% to qualified dividends or capital gains tax, you're paying ~45% in total, but people point to the 15% rate and trot out the "pays lower tax rate than secretary" trope.

> How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!

Those are all different taxes. Income tax is the same tax paid on the same money, twice. It's recursive. Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product. The total amount of sales tax paid on a car doesn't increase just because you increase the number of intermediary entities between the iron mine and the car dealership. With corporate income tax, it does.

[mikeyouse]

> The crux of his argument is this:

That's not the crux of his argument whatsoever, it's just a random statement being held up as a straw man.

> Income tax is the same tax paid on the same money, twice.

Except it's capital gains, intentionally taxed at a lower rate than income. The first tax is levied on corporate income, the second tax is capital gains which is taxed on the individual level. Different tax bases necessitate different tax treatment.

> Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product.

That's only true in the US. The majority of G20 countries that don't have capital gains + corporate income tax use a VAT to achieve the same ends.

Look at effective tax rates for individuals and corporations based in the US. We're one if the lowest taxed countries in the 1st world.

[AnthonyMouse]

> That's not the crux of his argument whatsoever, it's just a random statement being held up as a straw man.

Let me rephrase: The quoted statement is the closest thing he comes to as an argument on point. The rest of it is falsities and random talking points with no relation to the question.

> Except it's capital gains, intentionally taxed at a lower rate than income.

It's taxed at a lower rate because it's double taxation. It's the political middle ground between not having double taxation and having it at the full ordinary income rate.

> The first tax is levied on corporate income, the second tax is capital gains which is taxed on the individual level.

They're the same tax. It's all income tax.

Consider what happens when both entities are corporations. When Ford makes income, they pay income tax on it. If the income was from selling cars they would have paid the ordinary income rate. If it was because Ford owns shares of Exxon and Exxon issued a dividend, it would be the dividend rate. In either case, when Ford issues what's left over after paying its income taxes as a dividend, its shareholders have to pay income taxes on it again. And it's the same tax (again) whether the shares in Ford are owned by Henry Ford or Apple, Inc.

> That's only true in the US. The majority of G20 countries that don't have capital gains + corporate income tax use a VAT to achieve the same ends.

VAT and sales tax are economically equivalent, VAT is just collected at different points in the supply chain (which makes tax evasion more difficult). VAT is only collected on the increase in value over the cost of the raw materials (the "value added"), i.e. the portion of the sale price that hasn't already been taxed.

> Look at effective tax rates for individuals and corporations based in the US. We're one if the lowest taxed countries in the 1st world.

What does that have anything to do with double taxation?

Note also that the reason effective tax rates in the US are so low is the massive amount of tax avoidance that occurs. The nominal rates that US corporations would pay if they didn't all hold their profits in foreign subsidiaries are some of the highest in the world -- which is highly discriminatory against smaller non-international US corporations that can't play the same tricks.

[WildUtah]

The corporate dividend tax paid by individuals tops out at 20% today, so the example total should be $5.20. States usually tax both corporate profits and dividends at 5-10% also, so that's another 10-20% but that's usually deductible against the other taxes. Expect to keep about $4.30 from the $10 profit, if it's distributed as dividends.

[AnthonyMouse]

The 20% rate only applies to qualified dividends. If you don't meet the qualifications (e.g. you don't satisfy the holding period requirements) the dividends are taxed at the higher ordinary income rate.

[steveax]

Depending of course on the top marginal rate of the beneficiary of the dividend.

[jessaustin]

I think those numbers have some order-of-magnitude problems? 35% of $1B would be $350M, not $35B. Or maybe I'm just really not understanding this...

[mikeyouse]

Ha, good catch, you're understanding correctly. I was reading a story about Apple's $100B cash pile before I wrote this post.. corrected now.

[gamblor956]

The corporate foreign tax credit is even more generous than the FTC available to individuals. They get credit for taxes paid on the dividends (i.e., withholding taxes) and in some cases for the foreign taxes the dividend-paying company paid on its income.