Corporate Income Tax Lesson

"What they often leave out is the second part of the story, that Apple is one of the largest tax avoiders...& most egregious offenders" (amoung American corporations trying to avoid paying taxes).  John McCain in response to Apple saying they paid over $6 billion in corporate income taxes in 2012 but virtually none to any national government in overseas income

 

"What it (Earnings Per Share) really represents is 'taxable earnings.'  It is what is left after all the charges that the tax collector accepts as deductible.  But this figure is a purely arbitrary figure that has little or nothing to do with business performance… the essential fact about profit is that there is no such thing.  There are only costs."  Peter Drucker

 

click on photo of Apple executives being sworn in to testify before the Senate Permanent Committee On Investigations to enlarge

 

So now Apple is taking its turn in the barrel replacing GE who famously got scorched for paying no corporate income tax in 2010.  Although Apple paid plenty of U.S. corporate income tax in 2012 they paid virtually no Irish corporate income tax & that has aggravated some senators like John McCain & Carl Levin.  Go figure.

 

The one thing Apple & GE have in common is that they each found it better (i.e., less costly meaning more advantageous to their shareholders) to pay tax attorneys & tax accountants who prepared each of their monstrous returns that let them escape paying corporate income taxes than to pay the taxes with no regard to legitimate deductions or business strategies.  GE's tax return was 24,000 pages long & Apple measured theirs by height – over two feet.  The size of these returns in & of themselves tells you quite an expense & effort went into preparing them.  Make no mistake the compliance costs of preparing these returns is embedded in both companies products that we buy.  The point is these costs are less than the unbridled corporate income tax costs & submitting their returns the way they did was a sound business decision that saved every consumer, employee, & pension fund holder money.

 

Here is the corporate income tax lesson - people pay corporate income taxes – not corporations. 

 

Let's start with the most basic of finance & accounting equations: Revenue – Expense = Profit.  Now in order to pay tax on profit corporations must first collect revenue so that if the corporate income tax is derived from revenue it is the consumer who pays this tax when he buys the product – this covers the revenue part of the equation.  If employment or wages are reduced to cover the corporate income tax then unknowing job seekers or workers pay the corporate income tax – this covers the expense part of the equation.  If neither of the foregoing is immediately possible to cover taxes then the share holders, including individuals & pension funds will have reduced payouts of dividends or capital gains which covers the profit portion of the equation.  It is amazing how many people bad mouth corporations like Exxon Mobil, GE, & now Apple (whose products people love) but receive a portion of their retirement income (pension) from these companies – talk about not knowing what is going on.  But please understand that in no case will the corporation pay any corporate income tax – only consumers, employees, or shareholders do.

 

Think of your own individual income tax liability – it is based on how much income you make.  The same is true of corporations.  They do not go about their business all year long  -  & then @ the end of the year take money out of some stash to pay their taxes - & neither do you.

 

The corporate income tax is really an embedded cost that is priced into products charged to consumers, workers, or shareholders as described above so the higher the corporate income tax rate the less competitive a country's economy will be. This cascades down to investment decisions which will also be influenced by the capital gains tax rate.  It is just common sense that the lower the capital gains tax rate the more incentive entrepreneurs have to invest.

The optimum condition is for both of these taxes to be zero which they are under the FairTax.  Under the FairTax the U.S. would be the only country with zero tax on both production & investment thereby creating a great incentive for foreign companies to increase their presence in America - with plants, offices, & jobs.

In summary, business spending on new plants, equipment, offices, & labs indicates expansions that will produce quality jobs with good wages & it is the FairTax replacing the corporate income tax & the capital gains tax that propels this rejuvenated economy & middle class.

It is hard to get this message across with so many of our elected representatives being so economic illiterate either naturally or by political calculation designed to keep the citizenry dumbed down.  Attending town hall meetings to let them know we know better & have the answer to our problems in the FairTax might start to change their false outrage regarding companies like Apple.  Once you know for sure they know better, and still fake outrage, just don't vote for them ever again.

Now Professor Drucker takes all of this to another economic level with his quote I presented above.