Friday, September 15, 2017

Tamny On Lessons of Amazon's 2nd Headquarters Search

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). 







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