Apple's Taxes: A Teaching Moment About the Real Economic Impact of Corporate Taxes

May 01, 2012

Apple has become the latest U.S. company to have its taxes put under the media microscope. A recent New York Times expose' How Apple Sidesteps Billions in Taxes reports that Apple uses a variety of legal planning techniques to minimize its tax liability.

The article is particularly odd because while the reporters purport to document Apple's minimized tax burden, they fully admit that they have no way of knowing what Apple actually pays to the IRS in income taxes. Indeed, they say:

"Neither the government nor corporations make tax returns public, a company's taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes on their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments."

Despite such a caveat, the authors cite an estimate by Tax Notes columnist Martin A. Sullivan that Apple's tax bill would have been $2.4 billion higher last year were it not for its planning techniques.

Whether or not that figures is accurate, this is a good "teaching moment" to remind people about the incidence of the corporate income tax, because many readers are no doubt convinced by the underlying message of the New York Times expose' that U.S. companies should pay more taxes.

But economics teaches us that the real burden of the corporate income tax is borne either by consumers through higher prices, workers through lower wages, or shareholders through lower returns on their investment. So what might be the consequences to Apple stakeholders of a $2.4 billion tax bill?

Consumers: Apple sold an estimated 40 million iPads last year. $2.4 billion would amount to a $60 tax on each iPad. It's a good bet that Apple would have sold fewer iPads if the base price was $559 rather than $499.

Employees: Apple employs about 63,000 employees worldwide. $2.4 billion amounts to a $38,000 tax on each Apple employee. It's fair to wonder how much less those employees would have earned last year if Apple had paid $2.4 billion in higher taxes.

Shareholders:  According to a recent article in USAToday, "Morningstar says 788 U.S. stock mutual funds had Apple as one of their top 10 stock holdings." Moreover, "mutual funds aren't the only Apple fans: Institutions, such as pension funds, own $310 billion of Apple." To be sure, a $2.4 billion tax increase spread across millions of shareholders may not seem like much, but the impact on Apple's share value and, thus, the value of many pension funds shouldn't be underestimated.

These kinds of exposes make for sensational headlines, but they typically fail to tell the whole story.

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