President Obama’s Framework for Business Tax Reform has as one of its main elements a reduction in the top Corporate Income Tax Rate from 35% to 28%, a huge chunk of which is paid for by a dramatic reduction in tax benefits from Accelerated Tax Depreciation.
To be fair to all businesses, it only makes sense that this huge tax rate reduction would also apply at the individual tax level for any business income of Sub S corps, partnerships, and Schedule C income passed through to any business owner.
I think this key aspect of the Framework for Business Tax Reform is what makes it so massively powerful for US job creation and US economic growth.
It is pretty clear that 50% and 100% first-year bonus tax depreciation have been great for US Big Corporation earnings, but have not in the aggregate added a dime of US job creation by these same US Big Corporations.
On the other hand, a substantial permanent business tax rate reduction, especially one targeted predominantly at the lower levels of business income, is a very powerful US job creator.
Also, I think that once bright people figure out the impact of this trade off of income tax rate reduction for accelerated tax depreciation, the stock market will move up dramatically, assuming the stock market makes the determination that this aspect of the Framework will pass in a reasonably short period of time.
Common stock prices are driven by earnings.
This Framework will result in a massive increase in earnings for companies with their operations predominantly in the US.
Whereas a permanent tax rate reduction directly increases corporate earnings, a killing of accelerated tax depreciation deductions does not reduce corporate earnings.
Also, companies with massive investments in property and equipment will obtain an additional upfront first-year huge pickup in earnings from bringing down the US Federal Income Tax Rate on the Cumulative Accelerated Tax Depreciation Deductions it has already taken the benefit of.
These additional earnings benefit results from the reduction of the US Deferred Income Tax Liability related to the difference in the Book and Tax Basis of Property and Equipment from one where the US Federal Rate is now set up at 35% to the new reduced rate of 28%.
Let me explain the impact of this trade off more specifically by taking you around the country to its effect on many businesses in many different industries.
The basic concept is that everything else being equal, the market price of the common stock of the company operating only in the US should increase by the continuing annual percentage increase in earnings, caused by this switch from Accelerated Tax Depreciation Benefits to a 7% income tax rate reduction.
For pure domestic companies, and just looking at this trade off, the continuing annual earnings increase should be mostly about 11%.
I started out in my earlier Part One post with large companies in the US Southeast. And in my Part Two earlier post, I added large companies in the US Midwest. And then in my Part Three earlier post, I added large companies in the US Heartland. And then in my Part Four earlier post, I added large companies in the US Northeast, other than New York. And then in my Part Five earlier post, I added large companies in the US West, other than California.
Let me now move in this Part Six post to large companies with the majority of their US Profits in the State of California. Clearly, more than any other State, this is where the very strong new business start up entrepreneurial spirit exists.
As an introduction here, let me first show the California Corps with Worldwide Pretax Income above $1 bil in the most recent year 2011, and which also have a majority of their worldwide income earned overseas, along with what percentage of this income was earned in Foreign Countries.
……………..……............Worldwide
……………….…….............Pretax……….Foreign
………………….…............Income………Income
……..………….........(mils of dollars)…….Mix
Chevron……………........47,634………...79%
Apple……………….........34,205………...70%
Google………………........12,326………...62%
Occidental Petroleum..10,841………...56%
Hewlett-Packard………...8,982………...66%
Cisco Systems……….......7,825…………84%
Amgen……………….........4,150…………63%
Ebay…………………..........3,910…………55%
Activision Blizzard…......1,331…………53%
Adobe Systems……….....1,035…………69%
Agilent Technologies....1,032………….91%
Frankly, it makes no sense to me how Chevron generated only 21% of its 2011 Worldwide Pretax Income in the US, much lower than the 40% of its Worldwide Revenues in the US, and 33% of its 2011 year end Worldwide assets in the US.
Likewise, it makes no sense that Occidental Petroleum, generated 44% of its 2011 Worldwide Pretax Income in the US, much lower than the 63% of its Worldwide Revenues in the US, and 79% of its 2011 year end Worldwide assets in the US.
And there is something seriously wrong with US Tax Policy, when the giant Apple generates 30% of its Worldwide Pretax Income in the US, while at the same time, Apple generated a higher 39% of its Worldwide Revenues in the US, and had an even higher 54% of its Worldwide Long-lived assets located in the US.
It's all about Apple shifting income to much lower taxed countries, including China.
Well, just how huge of a foreign tax break did Apple receive?
Here's the total foreign tax breaks from having its indefinitely invested foreign earnings taxed at lower tax rates than the Statutory US Federal Income Tax Rate:
FYE September 2011.....$3,898 mil
FYE September 2010.....$2,125 mil
FYE September 2009.......$647 mil
Everyone is familiar with how Apple's earnings have spiked up. In the most recent two years, its Pretax Income increased by a huge 183%.
But that is a drop in the bucket as compared to its increase in foreign tax breaks in the most recent two years, which increased by a substantially higher 502%. Whew!
With this significant and massive uptrend of foreign tax breaks, Apple's Total Income Tax Expense, on a book basis, dropped from 31.7% in FYE September 2009, to only 24.2% in FYE September 2011.
President Obama’s Framework for Business Tax Reform has some incredibly powerful incentives to entice the above companies and many others to insource back to the US a huge chunk of these massive foreign earnings as well as the related jobs.
First, these foreign earnings shifted back to the US will be granted a 7% US federal income tax rate deduction.
Second, these foreign earnings shifted back to the US will be able to avoid a US federal minimum income tax on their foreign earnings. This provision is particularly focused in a fair manner at companies which overdose in shifting US income and the related US jobs overseas.
And third, there’s a special tax break for the costs of companies moving their operations back to the US.
Now, I’ll focus below on specific large California companies with US Pretax Income in the most recent year above $500 mil, and which also have the majority of their consolidated earnings generated in the US. I am also including some companies not making the US Pretax Earnings threshold but with a very large net Deferred Income Tax Liability position at the end of the most recent year.
Technology Corps
Intel
Exceptionally well run, clearly patriotic, Santa Clara, CA- based Intel generated US Pretax Income of a massive $14,659 mil in 2011, which was 82% of its Worldwide Pretax Income of $17,781 mil.
In 2010, Intel generated US Pretax Income of another $13,926 mil, which was 78% of its Worldwide Pretax Income of $16,045 mil.
Clearly, Intel is doing more than its part to reduce the massive US Deficit. And its US Pretax Income Mix has shot up from 57% in 2009.
Its Total Income Tax Expense, on a book basis, in 2011 was $4,839 mil, for an effective income tax rate of 27.2%. And its Total Income Tax Expense, on a book basis, in 2010 was $4,581 mil, for an effective income tax rate of 28.6%.
Two very positive items reducing its lower effective tax rate were the US Manufacturing Tax Deduction, which generated tax benefits of $337 mil in 2011 and another $337 mil in 2010, and US Research and Development Tax Credits of $178 mil in 2011 and another $144 mil in 2010.
The above two items are significant US job creators, and the President’s Framework for Business Tax Reform enhances and makes permanent both of them.
Thus, Intel’s After-tax Net Income was $12,942 mil in 2011 and $11,464 mil in 2010.
If you assume the US federal income tax rate would have dropped from 35% to 28% for both 2010 and 2011, Intel would have reduced its income tax expense in 2011 by roughly $1,026 mil, or by 7% X $14,659 mil, and in 2010 by another roughly $975 mil, or by 7% X $13,926 mil.
Thus, its 2011 After-tax Net Income would have increased by 8%, or by $1,026 mil divided by $12,942 mil, and in 2010 by 9%, or by $975 mil divided by $11,464. And its Equivalent Pretax Income in 2011 and 2010 would have increased by substantially more.
Intel has $14.2 bil of unremitted foreign earnings at the end of 2011. A whole-scale foreign earnings repatriation with a tax free holiday is patently unfair to the 99%, but I do think that a selective one-time one, with a somewhat lower US federal income tax rate upon foreign earnings repatriation should be considered for companies that clearly haven’t overdosed on shifting US income and the related US jobs overseas, like Intel.
On the other hand, the US Government has no business giving a windfall foreign earnings repatriation tax holiday for companies like Apple, Hewlett-Packard, Cisco Systems, Microsoft, GE, and many of the Big Pharma companies, which have clearly overdosed on shipping income and the related US jobs overseas.
But then I would allow this selective foreign earnings repatriation to clearly patriotic firms like Intel only if it were tied to clearly US job-creation initiatives, like US infrastructure investments, like US school construction fix-up investments, and like wise US Government Research and Development investments.
Oracle
Qualcomm
Applied Materials
Facebook
Exceptionally well run, loaded with talented, very driven employees, and clearly patriotic, Menlo Park, CA-based Facebook Inc generated US Pretax Income of $1,819 mil in 2011 and $1,027 mil in 2010. And these US Pretax Income numbers exceeded that of its Worldwide Pretax Income of $1,695 mil in 2011 and $1,008 mil in 2010.
Facebook’s Total Income Tax Expense, on a book basis, in 2011 was $695 mil, for an effective income tax rate of 41.0%. And this effective income tax rate was 39.9% in 2010.
Clearly, Facebook is doing more than its part to reduce the massive US Deficit.
Thus, Facebook’s After-tax Net Income was $1,000 mil in 2011.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Facebook would have reduced its income tax expense in 2011 by roughly $127 mil, or by 7% X $1,819 mil.
Thus, Facebook’s 2011 After-tax Net Income would have increased by 13%, or by $127 mil divided by $1,000 mil, due to the wise tradeoff in the Obama Administration’s Framework for Business Tax Reform.
When you think about it, Facebook is precisely the kind of company that should benefit from business tax reform. Its US Pretax Income is 107% of its Worldwide Pretax Income and its US investment in long-lived assets is a massive 98% of its total worldwide investment in long-lived assets. But yet its Foreign Revenue mix is a very nice 44% in 2011, and on a very strong uptrend…..38% in 2010 and 33% in 2009.....just great for everyone…..the US Government, the US economy and US job creation.
Sandisk
KLA Tencor
Intuit
Yahoo
Linear Technology
Financial Corps
Wells Fargo
San Francisco, CA-based Bank Giant Wells Fargo, which operates predominantly in the US, generated Pretax Income of a massive $23,656 mil in 2011, up 24% over 2010.
Its After-tax Net Income in 2011 increased by an even higher 28% over 2010, due to a lower income tax rate, on a book basis, from 31.5% in 2011 as compared with 33.4% in 2010.
Well Fargo’s US Current Federal Income Tax Paid or Payable related to its Pretax Income for the most recent two years 2011 and 2010 was a meager 11.2%. And in 2009, instead of paying US Current Federal Income Taxes, Wells Fargo received a US Current Federal Income Tax Refund.
Wells Fargo must be paying its income tax advisers, both inside and outside the firm, very well.
It also must be doing a very effective job in lobbying the US Congress. Check out these tax subsidies of $1.6 bil it received just in the year 2011.
…..Tax Credits…………………….......$735 mil
…..Tax-exempt Interest…………....$334 mil
.....Tax Excludable Dividends…....$304 mil
…..Life Insurance………………........$222 mil
…..Total………………..……….........$1,595 mil
And on top of that, Wells Fargo has received massive tax benefits from tax-advantaged leasing, which has resulted in a very favorable related Deferred Income Tax Liability of $4,344 mil.
And on top of that, Wells Fargo has also received massive tax benefits from a tax loophole which permits them to amortize for income tax purposes its massive amounts of Mortgage Servicing Rights on a much more accelerated basis than what it does under US generally accepted accounting principles. The related very favorable Deferred Income Tax Liability here is a huge $7,388 mil.
Whew! And we wonder why the US Deficit is so large?
And the US Congress, supporting these massive tax breaks for US Big Financial Corps, wonder why its favorable approval ratings are so low, and headed much lower?
And the Big Financial Corps wonder why the Occupy Movement so intensely focuses on them?
Anyway, Wells Fargo’s After-tax Net Income for 2011 was $16,211 mil.
Well, just how would Wells Fargo come out on the tradeoff between a 7% lower US federal income tax rate and the elimination of Accelerated Tax Depreciation?
Well, would you believe…..just fantastically? It’s true.
Wells Fargo doesn’t disclose its US portion of its income, but if you assume its Foreign Income portion is minor, and if you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Wells Fargo would have reduced its income tax expense in 2011 by roughly a massive $1,656 mil, or by 7% X $23,656 mil. And thus, its 2011 After-tax Net Income would have increased by 10%, or by $1,656 mil divided by $23,656 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Wells Fargo, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to write down the principal balances of underwater home mortgages, to permit underwater homeowners to refinance their mortgages at the existing lower interest rates, to make more loans to small businesses, and to also charge a more reasonable interest rate on small business loans.
Further, these huge annual tax subsidies Wells Fargo and other large financial institutions now receive should be eliminated.
Visa
Franklin Resources
Toyota Motor Credit Corp
Unionbancal
First Republic Bank
Leisure and Entertainment
Walt Disney
Exceptionally well run, clearly patriotic, Burbank, CA-based Walt Disney Company (Disney) generated US Pretax Income of a massive $7,330 mil in FYE Sep 2011, which was 91% of its Worldwide Pretax Income of $8,043 mil.
And Disney’s US Pretax Income Mix of its Worldwide Income was a huge 92% in FYE 2010 and 97% in FYE 2009.
Disney’s Total Income Tax Expense, on a book basis, in FYE 2011 was $2,785 mil, for an effective income tax rate of 34.6%. And this effective income tax rate was 34.9% in FYE 2010 and 36.2% in FYE 2009.
Clearly, Disney is doing more than its part to reduce the massive US Deficit.
Thus, Disney’s After-tax Net Income was $5,258 mil in FYE 2011.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE 2011, Disney would have reduced its income tax expense in FYE 2011 by roughly $513 mil, or by 7% X $7,330 mil.
Thus, Disney’s FYE 2011 After-tax Net Income would have increased by 10%, or by $513 mil divided by $5,258 mil.
In addition, Disney had a net Deferred Income Tax Liability of $1,379 mil at the end of 2011, caused by its heavy investment in Properties and Equipment. Thus, ignoring state income taxes, its US federal Deferred Income Tax Liability would have to be reduced by roughly $276 mil, and thus additional After-tax Net Income, of $276 mil in FYE 2011, due to this trade off in President's Framework For Business Tax Reform.
Therefore in total, the After-tax Net Income of Disney would have increased by a massive $789 mil in FYE 2011 by this key trade off included in the Obama Administration's wise Framework For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Disney, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to move more of Disney’s part-time workers to full-time status, to elevate the wages of its workers to a much more livable status, to hire additional full-time workers, and to also reduce the high prices it charges its customers, particularly ones who are financially strapped.
DirecTV
Health Care Corps
Gilead Sciences
McKesson
Allergan
Intuitive Surgical
Retail Corps
Gap
Safeway
Ross Stores
Utility Corps
Edison International
PG&E
Sempra Energy
