That Steve Wozniak is a truly gifted engineer is one of those things which I think he has proven over the years, something we can take from granted now. That he's fully au fait with the economics of taxation seems to be less certain. For he's just told BBC radio in the UK that he thinks that
Yes, I know, this perhaps isn't the way that people generally think about it but it is actually true. Here's Wozniak:
All companies, including Apple, should pay a 50% tax rate, Apple co-founder Steve Wozniak has told the BBC.
He said he doesn't like the idea that Apple does not pay tax at the same rate he does personally.
Apple,
And the specific direct quote:
Speaking to Radio 5 Live's Wake Up To Money, the tech entrepreneur said: "I don't like the idea that Apple might be unfair - not paying taxes the way I do as a person.
"I do a lot of work, I do a lot of travel and I pay over 50pc of anything I make in taxes and I believe that's part of life and you should do it."
When asked if Apple should pay that amount, he replied: "Every company in the world should."
And my insistence is that Apple is indeed paying that 50% or so. Which, given that we know that foreign profits get parked in Bermuda having passed almost unscathed through Ireland means that I must be mad, right, Worstall is off his trolley! Except no, I'm afraid I'm not. I'm thinking about the economics of this, that is all, rather than who is actually writing the check to Uncle Sam. That is, we have to consider the economics of tax incidence.
Who is it that actually carries the burden of a tax? Your employer pays some FICA tax for employing you. But all economists would insist that some to all of that supposedly employer FICA is actually paid by the worker in the form of lower wages rather than the employer. It's the brewer or distiller who pays the alcohol levy or excise tax in terms of cash or check, but it's we consumers who actually carry the burden of that tax. In the first iteration (and let's not get more complicated with the longer term effects) the burden of the corporate income tax falls upon the stockholders in the corporation. Their stock is worth less because Uncle Sam gets a slice of the profits thus whatever capital gain they get is lower. Or, if you prefer, Uncle Sam gets a slice of the profits before the dividend is paid out. Thus their dividends are lower. To complete the circle of course it is the lower dividends that make the stock worth less.
Do note that a US corporation cannot pay out dividends from profits that have not paid US corporate income tax. Uncle Sam definitively gets his slice.
Those dividends are then taxed again in the hands of the recipients. And thus it's the two sets of tax together which make up the total tax burden on that economic entity Apple. And we know what that is from this recent Tax Foundation report:
The combined top federal tax rate on equity-financed corporate income in the United States is 50.47 percent, compared to a top federal tax rate of 43.4 percent on other business income.
That's adding the special lower tax rate for dividends to the effects of the corporate income tax.
Now, you can, of course, say that Apple is a person and Apple should be paying tax just like any other person. But that's to misunderstand what a company is: it's a legal person, not a natural person. A legal person, as Citizen's United states, has certain rights shared with natural persons but they are still not the same thing. And in economic terms we insist that only natural persons can carry the burden of a tax: any tax, every tax, means the wallet of some live human being gets lighter.
To approach this in another manner. A Limited Liability Partnership is one method of organising a business. It's a legal person: but it's a pass through entity for tax purposes. Those partners are taxed upon the income at normal income tax rates. There's a difference between S corporations and C corporations. One is taxed like a partnership, as a pass through, the other taxed under the corporate income tax code and then again at the level of the recipient of the dividends. In economic terms we would like to have broadly similar tax rates for the entire economic unit in each case. And in each case that economic unit is the organisation itself, the legal person, plus the people who own it, the partners and or stockholders, those natural persons.
That is, our economic unit here, the one we want to tax is not (Apple Inc) and then separately (Apple Inc stockholders) but instead our economic unit to be taxed is (Apple Inc plus Apple Inc stockholders). And now that we've properly identified what is Apple for taxation purposes we can see that, as the Tax Foundation says, Apple really is paying a 50% or so tax rate. For it's the combination of the corporate income tax rate and the dividend tax rate which needs to be considered. Those two are, together, the taxes being applied to this economic activity and the taxes, added together, that most closely resemble the personal income tax rate which Wozniak is stating as his own tax rate.
At which point we've got to decide what we should do about all of this. And my solution is a long standing one. Just abolish the corporate income tax altogether and tax dividends and capital gains (perhaps with an inflation adjustment) at those normal income tax rates. We waste vast sums of money and effort playing with that corporate income tax and abolishing it would have the virtue of simplicity and efficiency. But more than that all would finally see the economic reality here. A limited liability company, an Inc like Apple, is just a group of natural persons pursuing economic activity through a certain legal structure. So, tax them like it, instead of absurdly insisting that there's an economic difference here between S and C corporations, corporations and partnerships and even corporations and any other grouping of people.
Tax economic activity just the once, at the level of the natural person, and abolish the whole corporate income taxation system in its entirety. For the truth is that, properly defined, that economic entity "Apple" already is paying 50% in tax.
