Wednesday, May 17, 2017

Shore Losers

Donald Trump has an idea. Lower corporate tax for American companies for a short-term moratorium to encourage them to bring the hundreds of billions of off-shore dollars into the United States. Golly gee, that’s such an original idea! Did Donald thunk that up all by himself or did he rely on right wing advisors who simply cannot believe this concept will not work? After all, supply-side economics are the cornerstone of virtually all of Trump’s tax policies.
That one-time tax rate he thinks will work that magic is 10%, a lot less than the current federal 35% corporate tax rate. With all the money pouring into the country, he touts, think about all the jobs that the companies with all this excess cash will create. Some of the biggest off-shore accounts – noted above in a statistical chart from the May 6th – belong to the massive cash generators from the Silicon Valley. The Alphabet noted above, by the way, is Google’s parent. There are lots of other companies all over the United States with similar potential windfalls.
It’s all part of a failed theory that I have blogged about over the year – trickle-down or supply-side economics or “incentivizing the job creators” – based on an assumption that rich folks and big companies with massive newfound money from tax windfalls jump to hire additional workers and give everyone a raise as their first priority. The theory sort of dismisses how those wealthiest segments typically grow their businesses: analyze supply and demand, the competitive environment, underserved business segments, looking at stock pricing trends and the cost of capital and build a business plan to implement those projections.
Unless there is a clear business justification, none of these companies say: “Hey, now that we have lots of new money, let’s start spending it immediately on hiring more workers.” In fact, one of the first “go-to” applications of massive corporate cash windfall cash is to (a) buy up your own stock if you think you are undervalued or (b) think about acquiring competitors and necessary vendors to increase operational efficiencies and profit margins. For those who make contrary assumptions – like Donald Trump – history offers some pretty harsh lessons. Here’s what I said in my May 2nd blog:
Trump and his Republic cronies are deeply committed to the overwhelmingly-disproven trickle-down economic policy – most recently resulting in a near bankruptcy to the last state, Kansas, that attempted to implement it – where, by cutting taxes, the wealthy will theoretically instantly use their newfound excess cash to hire people in droves. I guess they forgot that these folks got rich in the first place (where they didn’t inherit it) by figuring out if there was sufficient business reason to grow and hire other than getting a windfall in lower taxes. Hmmm. Trickle-down, supply-side, incentivize-job-creators economics needs to go away. It never works.
Or the last time we gave a tax break to bring off-shore corporate money into the U.S., during the Reagan years, the result was a flurry of mergers and acquisitions that solidified big corporate power (vs competitive forces that might have benefitted consumers) and resulted in skyrocketing layoffs, the usual result of efficiencies almost always instituted when big companies combine.
Did someone say “skyrocketing layoffs”? You mean these companies might use this money to create new business structures with an eye to require fewer workers, pretty much the inevitable result of a merger or corporate acquisition? Perhaps, instead, they will use that money to purchase new, state-of-the-art, often-artificially intelligent, automated manufacturing equipment? Either way, the corporate owners make more money using fewer workers. And this helps “job creation” and “income equalization” how?
A few politicians after the Reagan supply-side debacle learned their lessons. Or did they? “Some may remember that such a repatriation plan was tried back in 2004, and with arguably poor results. In fact the Senate Permanent Subcommittee on Investigations studied George W. Bush’s tax holiday in 2011 and concluded that it was a failed tax policy.’ Foreign monies were allowed back in at a low 5.25% tax rate, but the tech companies did not use it to build factories, but rather for stock buybacks and management bonuses.” W’s father (George H.W. Bush), during his presidency, called supply-side efforts “voodoo economics.” But W learned the hard way.
Meanwhile, Apple has been pushing the Trump administration for that one-time tax break, promising a huge investment in new American jobs. “[CEO Tim Cook that given this tax break,] his company will invest a cool billion in companies that will create jobs in the U.S. He gave no details on the type of companies that will benefit, or about the types of jobs that will be created.
“Cook announced the new fund during an interview with CNBC’s Jim Cramer on Wednesday [5/3]. The Mad Money host asked Cook about the monstrous pile of dollars Apple has parked with its overseas subsidiaries, referring to the growing chorus of people wondering why Apple doesn’t do something interesting with all that cash—like buy Disney or Tesla, for example.
“Cook told Cramer that under the current tax regime Apple would have to borrow money if it wanted to buy anything big. But that situation, whether real or overdramatized by the Apple CEO, could change quite soon.” Let me just say that “borrowing” is almost always a smart financial strategy in the world of mergers and acquisitions; interest payments on debt are almost always cheaper than the rate of return expected by equity investors. Make a small equity down-payment and use the acquisition target’s own cash flow to finance the debt. And business debt is always tax deductible. So that Cook would borrow to buy corporate assets is a great big yawn-“duh.”
Let me see. He invests $1 billion to create new jobs, but Apple has another $193.4 billion to use to give his management big fat bonuses, pay out dividends (a recent policy shift at Apple), buy his own stock or acquire some big companies… with cash to spare. Just guess how the Trump tweet/press release would depict whatever Apple expects to do with that cash? Precisely. But what will actually happen? Yup, you got it.
I’m Peter Dekom, and in the end, just like Trump’s recent House-passed “repeal and replace” healthcare act, the one-time tax break to bring corporate money on-shore benefits the rich at the expense of ordinary workers.

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