Line Item Analysis: Corporate Tax Rate

In my tax proposal, one of the issues I address is the corporate tax rate.  With all of the recent hoopla around $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 US 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 $GOOG.  This more recent NYT article provides a helpful explanation of a traditional tax strategy for a company like $AAPL (more specific $AAPL example provided by @ritholtz in related reading section at end).

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:

  • US 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 (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.

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).

Ultimately, while I enjoy discussing different tax rates separately, they are inevitably intertwined and must be addressed as such.

Back to the corporate tax rate, there were many superb articles on this issue today, some of which I’ve already linked to above, as well as included below (and will add to as I come across some more of them during my continued research of the issue today).

On a final note, you can find some solid charts by clicking on this link from one of my previous articles which briefly addressed corporate tax issues.

Related Reading:

@moorehn: Tim Cook’s pitch for a corporate tax holiday suits Washington just fine (tax holidays just incentivize cos to wait for the next holiday, we need to pick an optimal rate and stick with it – Jon)

@bbcstephanie: The Real Corporate Tax Puzzle (solid stats, charts, and insights into corporate tax receipts as a % of GDP – Jon) h/t @timharford @ccordeiro14

@schaeferstreet: Levin Rips Apple’s ‘Holy Grail’ Of Tax Avoidance Ahead Of Cook Testimony h/t @reformedbroker (Hot Links)

@ritholtz: Apple’s International Tax Structure