Why Is Apple Planning a Huge Bond Issue?

Apple has tens of billions of dollars of cash.  So why is it considering a $10 billion bond issue?

Despite its huge cash stockpile, Apple plans to issue debt to help fund dividend payments and stock buybacks in part because much of its cash is overseas. Raising money in the debt market would help Apple avoid the big tax bill that would come from bringing the cash back to the U.S

The US is the only major company I know of that double taxes foreign income of its corporations.  Outside the US, the general principle is that a company pays taxes locally in the country in which income is earned, and then can repatriate that money freely.  Apple has already paid taxes on this money locally (granted, at relatively low rates, but country's corporate tax rates are lower than ours).  But it must pay something like 35% to repatriate that money to the US.  This is sort of a negative stimulus, a multi-billion dollar incentive for Apple to find some way to spend this money overseas rather than in the US.

I will reiterate my tax plan.  Eliminate the hugely distortive corporate income tax altogether.  Instead, tax all individual capital gains and dividends at regular income rates - no special low rates.  Corporate earnings are thus taxed when they flow through to individuals either as higher equity prices or as dividends.

The savings and benefits would be huge --

  • an order of magnitude less room for special interst lobbying
  • the elimination of crony tax breaks for favored industries
  • the elimination of the tax preference for debt  (this is the other game Apple is playing - take on tax-favored debt to boost your stock price)
  • the elimination of all sorts of bizarre and unnatural corporate tax schemes and vehicles
  • the elimination of all that corporate legal tax expense
  • the elimination of two sets of books for every company (every major corporation has two sets of books, one for investors and one for the IRS, differing in many ways including depreciation methodology)


  1. Joe_Da:

    Are you trying to put us CPA's out of a job?

    While I am not in agreement with eliminating the corporate income tax, there are many misconceptions on both the right and the left in regard to tax policy. For example, that all corporate income tax gets passed through to the consumer. Depending on the product and the elasticity of demand for the product, some but not nearly all gets passed through to the consumer.

    Elimination of the preferential treatment of debt v equity has come and gone so many times since 1969 (section 385) that it makes my head spend. The double taxation of non -US source income, has also been a major trouble spot, though any modification is virtually impossible since it would make the left wing nuts go bananas (as if that would be an oxymoron).

    The complexity of our tax code is a function of the need to generate unreasonable amounts of revenue to attempt to cover the spending while buying favors for every voter out there.

    Just a few random comments on tax policy - The lower capital gains rate to a large degree is really an adjustment for the inflation costs of selling an asset. During high inflationary times (1970's and 1980's), it was common to have an economic loss on the sale of an asset while paying capital gains tax. Bush's tax cuts for dividends was an attempt to reduce the double taxation of corporate earnings and the subsequent taxation of dividend income on previously taxed income.

    In summary, adjustments to the internal revenue code for purposes of creating sound rational tax policy is severely hamstrung by both the right and the left (though more so by the left due to the class warfare that makes up so much of their base)

  2. jt:

    There would be a net loss of tax revenue. Non-taxable US investors such as pensions and endowments capture a sizable percentage of corporate dividends and capital gains. Eliminating the corporate income tax would allow profits to flow to them untaxed. The same is true of foreign investors who realize capital gains on US stocks but file no US return (they do get hit with dividend withholding though).

    As mentioned above, it would likely greatly reduce the amount of newly issued corporate debt as without a corporate tax, the debt tax shield is worth zero. The ripple effects of that would be interesting.

  3. john mcginnis:

    Gosh OP, I think you answered your own question. If APPL drags back any portion of the capital made in China they lose a third of it to Uncle barring any fancy accounting. Far easier to offer the bond issue. My only query is why issue the bonds here unless it is a further attempt to avoid the taxman.

  4. marque2:

    Interestingly Apple's money is actually in the USA. The profits are part of the companies foreign entity, but that entity is free to invest the money in the USA.

    I wonder if it would have been better to have borrowed from one of the overseas divisions, and use the internally borrowed money for payments instead.

    Anyway, the double tax isn't the issue, since the company writes off against US taxes what was paid in foreign taxes. Say they have a division in Japan that is taxed 20% in the USA they supposedly would pay 38% - the 20% they already paid and just give the USA the additional 18%. However 38% - and 45% for oil companies is outrageous. Lower the tax rate on companies to 15% and even if we do tax them on the difference - in most cases there will be no difference - since the tax rate overseas is higher.

  5. marque2:

    They would lose 1/3 if China charged zero tax. I believe they do get some kind of credit for taxes paid overseas.

  6. marque2:

    You can talk elasticity all you want. If consumers won't accept the increase and it become unprofitable the company will just shut down.

    Though agreed in the economics class depending on various factors, usually the whole tax increase can not be passed along and the company will have to eat at least a portion.

  7. Matthew Slyfield:

    A CPA so ignorant of basic economics is sad.

    If they can't pass it on to consumers in the form of higher prices, it will be passed on to consumers in the form of lower quality products and / or services. Even if they take the entire tax hit as a reduction in profits, that is money that couldn't be invested in new products, improved products, or reducing the cost of existing products so it still hits the consumers in the form of fewer and / or lower quality more expensive products.

    Since investors and lenders expect to get their money back, every dollar spent by any business ultimately comes from their customers.

  8. Mark:

    I agree with eliminating the corporate income tax, which exists legally as an excise tax. But, instead of a net corporate income tax, we should just move to a gross income tax, i.e. a national sales tax. This is the easiest to collect and cannot be manipulated. If the sales tax was 6-9%, efficiency savings in most businesses would probably absorb much of the increases in consumer prices.

  9. mesaeconoguy:

    Tax policy matters.

    A lot.

  10. Corky Boyd:

    Taxing long term capital gains at regular income rates is unfair and highly distortive. It inhibits reinvestment into more productive ventures. Say you want to sell your newpaper stock to buy Google. Often such a sale might put you into the highest bracket and depending on the state you live in, strip away 50% or more of your proceeds. A 50% penalty up front means you need a stock or other investment that will retun double what you are trading it for just to break even. So it tends to lock investors into existing investments. Capital does not flow to the most productive ventures.
    The other reason it is unfair is the value of a long held investment has been eaten away by inflation. You are being taxed for the government's inability to maintain a stable currency.
    Many other countries recognize the unfairness of capital gains taxes and either don't tax them at all or tax them at lower rate than earned income.

  11. morganovich:

    this plan would never work.

    consider the incentives/arbitrage you are setting up.

    i would immediately incorporate as a holding company/conglomerate. all my pay would go there. it would hold all my investments and property. i would be paid a bare bones salary and run most of my expenses through the corporation. this would result in my paying pretty much no tax.

    it would not take long for everyone to figure this out.

  12. Joe_Da:

    One of the things I enjoy on the Coyote Blog is the professional and polite level of discourse on the various subject matters. Though I have noticed that those who throw insults around do so because they lack real knowledge of the subject matter.

    Your second paragraph is partly/superficially correct, yet greatly oversimplifies the real world empirical data. Your third paragraph is not even close to being correct. Most of your freshman level economic textbooks cover this subject matter. My last suggestion is that you should avoid both the right wing and the left wing talking points as they often demonstrate a very shallow understanding of the subject matter.

  13. NL7:

    The main loophole, if you can call it that, would be turning corporations back into the tax-favored entities they used to be. I could start my own corporation and find a way to defer my own income until I wanted to spend it. I may even be able to borrow against my corporate holdings, and debt is not income as long as it must be paid back.

    You could fix these problems, of course. A prohibition on mortgaging your un-taxed equity, for example. Or you could simply allow this sort of gaming and open it up to anybody; anybody can create a tax savings vehicle (an unlimited IRA, more or less) and as long as they leave the money in there, and don't borrow against its value, then they aren't taxed on the income. Otherwise known as an unlimited savings deduction (the most important part of the so-called "flat tax" is that it exempts savings income from capital gains and dividends until they are consumed).

    But if you didn't make it generally available, then owners of small businesses, such as yourself actually, might be able to find ways of retaining large cash and asset stores and thereby defer income. This is easiest in a closely held business. It's why there is an Accumulated Earnings Tax, to make corporations disgorge cash reserves in excess of business needs. It doesn't matter since the 80s, as corporations are generally tax disfavored. But your plan would make corporations tax havens. My suggestion is to run with this and make it available to everybody with an unlimited savings deduction. The main drawback is that this is basically a consumption tax levied against income not saved, so the tax cut will be lopsided in favor of the wealthy.

  14. NL7:

    Forgot to mention the obvious opponents of this reform, aside from Democrats and progressives and "revenue neutrality" pundits, will probably include accountants, major corporations and charities. Accountants stand to lose a lot of work (as do tax lawyers), major corporations that have already successfully gamed the existing tax code will see their competitors with poor tax planning get comparatively greater benefits from the change (while watching government contracts and giveaways dry up), and major charities will see the value of their tax exemption reduced. Of course, accountants will still have valuable skills that can be applied somewhere (including dodging the remnants of the tax code). Corporations will still be better off in absolute terms. And charities will still have the powerful "charitable deduction" to tempt donors, as well as their exemption from state and local taxes.

  15. NL7:

    I agree this is a problem, but personal holding companies are already a problem and are already a focus of IRS attention. So it certainly isn't insurmountable. As it stands you can attribute your service income to a corporation and park the money there, then try to get it later as a dividend. This is not actually allowed and if discovered it is subject to penalties.

    If you adopted the unlimited savings deduction, then this would be a feature of the system and not a bug. Nothing is income until you spend it; any savings reinvested in a business or capital investment would be deducted from taxable income. The most obvious problem I see is people pledging their savings to get loans, which could be prohibited (e.g. banks could be required to refuse to mortgage untaxed equity or untaxed savings, or forced to withhold taxes on such loans).

  16. NL7:

    Watch the states scream as you raise their residents' effective sales tax rates to 11 to 18 percent, partially eroding the states' tax base.

    You'd also have to tax Internet sales and maybe crack down on things like ebay or craigslist (or else watch secondhand sales raise and erode your tax base).

  17. NL7:

    Most of the academic studies assume the corporate tax incidence falls on employees.

    Oxford study: "$1 of additional tax reduces wages by 92 cents in the long run"

    Other studies here also assume labor pays some of the corporate tax, maybe a lot of it.

    Obviously consumers, vendors and shareholders are at risk as well.

  18. NL7:

    "Company" includes shareholders and employees, maybe also their vendors. Policymakers subconsciously assume the tax falls on shareholders and maybe top executives, but academic economists usually assume it falls on employees. It seems likely that the incidence will fall more on low-level employees and their benefits, assuming that they have less bargaining power.

    If the corporate tax is mostly a different way to collect payroll taxes and sales taxes, then it seems like it's largely regressive anyway.

    Maybe corporations should include with W-2s the proportion of the corporate tax and the employer-side payroll tax that the company has paid for each employee.

  19. Gil:

    If Apple can't be as profitable as it could be then it would bear the costs directly when customers switch to Apple's competitors.

  20. Matthew Slyfield:

    Tax policy would affect all companies in a given industry relatively equally. So the competitive advantage you think you see doesn't exist.

  21. Tim Briggs:

    Enjoy your blog, but I would like to point out one inaccuracy. US companies and individuals are allowed a foreign tax credit. Tax owed on repatriated earnings would be reduced dollar for dollar the amount of foreign taxes paid (some limitations). Nonetheless, our corporate tax rate is way too high and the double taxation occurs when we tax dividends.

  22. txchigger:

    I agree with Joe_Da's earlier comments concerning the impact of inflation. Long term capital gains should not be taxed as ordinary income since in essence the govt would be taxing the seller of the asset on phantom paper gains due to inflation, which the govt itself helped to create. I believe that the Australian's adjust the capital gain estimate for inflation prior to assessing the tax liability. A similar approach would not be that onerous in the U.S.

  23. Steve:

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