|
WHILE REPUBLICAN SHOULD BE CHEERED for pursuing tax reductions, the
corporate portion of their tax plan is right out of the early part of the 20th
century when the top companies were long on plant & equipment. As Amazon's
search for a 2nd headquarters reveals in bright colors, the prominent companies
of the 21st century are long people as opposed to machinery. Worse, the GOP
continues to promote the fiction that there's $2.5 trillion "stranded overseas"
as though overseas profits are literally stuffed in a vault. Tax cuts are
great, but they'll be discredited if they're about less than nothing.
Subsidization of plant & equipment purchases and repatriation holidays are
surely about less than nothing, while the capital subsidy is legitimately
anti-growth. RealClearMarkets.
By John Tamny
In 2006 Warren Buffett invested $4.5 billion in Iscar, an Israel-based
machine-tools maker. Notable is that Iscar was within easy distance of the
enemy rockets that exist as a constant threat to the small country, its
businesses, and most important of all, its people. For that reason, the
investment puzzled some of Buffett's admiring watchers.
But it turns out the Nebraskan wasn't fazed in the least by the risk of
having a substantial asset so close to enemy fire. As Buffett biographer Alice
Schroeder explained it, "if Iscar's facilities are bombed, it can go build
another plant. The plant does not represent the value of the company. It is the
talent of the employees and management, the international base of customers, and
the brand that constitute Iscar's value."
Schroeder's reply about what drives Buffett's thinking should be taped on
the wall of every member of Congress, regardless of Party. And as the
Republicans are happily writing a tax-cut bill right now, Schroeder's reply
should force a rethink of the GOP's tax-cut strategy. This isn't a call for the
Republicans to reverse course on tax reduction (quite the opposition) as much as
it's a reminder that their very public focus on immediate expensing of planet
and equipment purchases, along with repatriation of profits "stranded" overseas,
amounts to a lot of nothingness.
Evidence supporting the above claim comes care of Buffett's Iscar
investment, but also via Amazon's recent announcement that it's looking for a
non-Seattle city in which it will create a second corporate headquarters. The
Seattle giant's requirements reveal in bright colors why the corporate portion
of the GOP's planned tax reform will not live up to expectations.
RealClearMarkets contributor Allan Golombek explained well what Amazon is
looking for in a second city:
Amazon has stated that to even be considered as
the home of its second corporate headquarters, a city needs a million-plus
metropolitan population, mass transit, a strong higher education system, a large
technically fluent workforce, and the ability to attract and retain skilled
workers. In other words, they want immediate access to the kind of workforce
they need to compete, targeting software development engineers, accountants and
administrative personnel, with many of the jobs paying $100,000.
Amazon's needs speak to the basic truth that people drive economic
progress, not natural resources, buildings, or subsidies. While Amazon will no
doubt seek - and receive - tax inducements from the winning city, the bigger
driver of the company's decision about where to put down substantial roots will
be the quality of the people in the chosen area.
What's important about Amazon's headquarter search with tax reform in mind
is that the promised Republican subsidization of plant and equipment purchases
through immediate expensing is revealed as pointless, and arguably anti-growth.
That's because the best and most valuable companies of today don't have major
plant and equipment needs.
Uber and its $70 billion valuation is a function of an app that people can
download on their phones, along with the long-term ability of the ride-hailing
innovator to attract the people capable of extrapolating the app's use to all
manner of goods and services. Google has its GooglePlex, but if California's
taxation ever becomes too onerous, the technology company won't miss a beat. It
will simply move its top asset - the people who show up for work every day - to
the many cities, states, and countries that would welcome it with open arms.
Apple has its amazing new headquarters, but the headquarters are a
happy effect of the genius thinkers who darken its futuristic spaceship's doors
each day.
So while many of today's most prominent American companies (Apple, Google,
Facebook, Amazon and Microsoft presently list as the five most valuable
companies in the world) certainly have gleaming headquarters, plant and
equipment are well down the list as crucial drivers of their success. Despite
this, Republicans act as though their subsidization of capital spending has
stimulative qualities. Maybe it would have over 100 years ago when the U.S.'s
top companies included Ford, GE and GM, but not so much now. The plant and
equipment portion of the GOP's tax plan addresses an early 20th century U.S.
economy, and for it subsidizing a return to what mattered long ago, the tax plan
has anti-growth qualities to it.
As for repatriation of profits earned overseas and that are "stranded"
overseas by onerous taxation stateside, there's nothing to this assertion.
While the corporate tax should be zero since it amounts to a double taxation of
individual earnings (individuals own corporations, always and everywhere), and
while there should be no tax on the repatriation of earnings realized overseas,
simple logic tells us that U.S. companies aren't materially affected by taxes on
profits brought back to the U.S. Lest we forget, the only closed economy is the
world economy. Overseas earnings, like ones achieved domestically, are
deposited in banks or with other financial intermediators. Once they are,
they're immediately directed to their highest use, including growth
opportunities in the U.S.
And for corporations with substantial overseas earnings and that have
domestic designs on their deployment, they can borrow the money while actually
deducting from their tax bill (another pointless subsidy, but nonetheless one
that exists) the interest paid on monies borrowed. Translated, there's nothing
that reasonably resembles a substantial barrier to repatriation of overseas
profits. While there should once again be neither a corporate tax nor a tax on
earnings repatriated, the very notion of "stranded money" presumes that
companies literally warehouse their foreign earnings in the proverbial corporate
basement.
So while the Republicans should be cheered for pursuing tax cuts and/or
reform, the corporate portion of their plan requires more than a shrug for it
having the potential to needlessly subsidize the past to the economy's certain
detriment. And as tax cuts are improperly scored on a dollar for dollar basis,
wasted tax cuts have the potential to limit the good, very good and wonderful of
income, capital gains, and estate tax (repeal, hopefully) cuts. Amazon's
relocation efforts are useful when it comes to understanding what the GOP gets
wrong in its pursuit of what has the potential to be very good and very
important.
John Tamny is editor of RealClearMarkets, Director of the Center for
Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador
Research and Trading (www.trtadvisors.com). He's the author
of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).
|
No comments:
Post a Comment