Did Apple’s CEO Just Make a Case for More Dividends?

There is much to despise about the U.S. federal income tax code. Setting aside the obvious – that it even exists – the code is composed of a byzantine sprawl of commands and counter-commands. Even the simplest tax return is guaranteed to consume tens of hours of life’s most precious resource – time – to complete.
Then there are the actual tax rates. U.S. corporate income-tax rates, in particular, are an abomination. They’re akin to asking the fastest Formula 1 race car to win the Grand Prix of Monaco with an anchor tethered to its rear suspension.
This point was driven home by Apple (NASDAQ: AAPL) CEO Tim Cook, who recently took a swipe at the federal income-tax code as it pertains to his company. Cook said that Apple will not repatriate its considerable offshore cash hoard – estimated at $181 billion – until there’s a change in the federal tax code.
Here’s Cook, in his own words, on the subject of U.S. corporate income taxes: “When we bring it [offshore profits] back, we will pay 35% federal tax and then a weighted average across the states that we’re in, which is about 5%, so think of it as 40%. We’ve said at 40%, we’re not going to bring it back until there’s a fair rate. There’s no debate about it.”
I understand Cook’s recalcitrance. U.S. corporations pay the highest corporate income tax in the developed world. The top U.S. marginal corporate income tax rate sits at 35%. Factor in state and local taxes, and the effective rate, as Cook notes, frequently exceeds 40%.
How abominable is the U.S. corporate income tax rate if you aspire to compete on the world stage? In comparison, Ireland has a top marginal corporate income tax rate of 12.5%; the United Kingdom has a 20% top marginal corporate income tax rate; Sweden has a 22% top rate; China has a 25% top rate. Better for U.S. corporations to leave the money over there than to repatriate and have it taxed at triple the rate, in some instances, over here.
And there sure is a lot of money stashed over there.

Offshore:  $2.1 Trillion

U.S. corporations hold an estimated $2.1 trillion in offshore earnings. Of course, not all that money can be employed to earn a required rate of return. If the U.S. corporate income tax rate were lower, much of those offshore earnings would find their way back to U.S. shores.
They’d also likely find their way into shareholders’ pockets. Cook didn’t say it, but I can infer from his statements that if the tax code were changed to make it economically feasible to repatriate cash, more of that money could find its way into Apple’s shareholders’ pockets as dividends.
Cook’s comments are sure to amplify the debate over income tax policy as we trundle into the November election. Republican White House contender Donald Trump is on board with lower tax rates. Trump would like, among other things, to lower the top corporate income taxes to 15% from the current 35%.
Democratic nominee Hillary Clinton could also offer some accommodation. Clinton enjoys the backing of Cook, Warren Buffett, and many other top CEOs. She might be unwilling to lower the top corporate income tax rate, like Trump, but she could easily be amenable to a repatriation tax holiday. After all, some quid pro quo is due. (While a U.S. senator, Clinton voted in favor of the 2004 American Jobs Creation Act, which had a provision for a repatriation tax holiday.)

A Gush of Large Special Dividends

In other words, 2017 could produce a gush of dividend payouts from Apple and other companies with large offshore cash accounts. All they need is a window of opportunity – a less onerous tax hit – and they’ll do it.
When that window opens, Apple and other corporations will repatriate a sizable chunk of their sizable cash. In turn, you can be sure that more dividends – special dividends, in particular – will be paid to investors.
You can also be sure that I’ll be ready.
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