Friday, May 4, 2018

U.S. Companies Have Little Reason To Bring Jobs Home

Will Lower Corporate Taxes Bring Jobs Back?
The ugly truth is American companies have little reason to bring jobs home, the logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. The structural issues that haunt America's competitiveness far outweigh the benefits of lower taxes. This means that we should not be surprised when the effort Washington has made to cut and reform taxes does not create a huge flow of jobs returning to our shores. Reality can have an ugly edge so it is best to not look too close or you may be disappointed. In this case, at the end of the day, the pathetic GOP tax bill boils down to borrowing more than a trillion dollars from the American public and exploding the deficit in order to pay higher dividends to wealthy private stockholders.

The tax bill does little to level the playing field when it comes to issues such as healthcare cost and over-regulation. This means the following continue to act as barriers to doing business in America.

  •        High Healthcare Cost
  •        Over-Regulation
  •        Unenthusiastic workforce
  •        Legal System And Litigation
  •        Environmental Protection

Healthcare costs remain one of the biggest factors US companies can point to as a reason to steer clear of manufacturing goods in America. Following healthcare is the issue of litigation and the army of attorneys lurking in the nooks and crannies always ready to spring an expensive lawsuit on American companies. These two impediments to doing business are two of the largest cost disadvantages America faces but a slew of others such as government regulations on the treatment of employees and pollution still haunt America. While tax reform was recently front and center we should not forget Washington has fallen short in many of these other areas.

For many years companies have offshored production and shipped jobs abroad but lowering the tax rate is simply not enough to bring the jobs back home. Of course, while we hoped and were told tax reform would mark a major shift in companies deciding to keep jobs here in America may not happen. This narrative that helped to win passage of the legislation and the many assertions made by politicians and their allies in the world of economics will not in itself lead to more investment. The higher productivity and the increased economic growth many expect could fail to materialize as capital flows into stock buybacks, real estate, commodities and speculative areas such as cryptocurrencies rather than flowing into equipment and factories.

Pulling factories back from overseas coupled with the threat of a trade war is causing people to question whether we are witnessing the end of what appeared to be harmonious global growth. The narrative that everyone is pulling together to generate a synergy that lifts all boats higher has been behind forecast of glowing growth going forward. Money reparated to America and jobs being created is something which many bulls were counting on to move the markets higher. Still, the idea that we are finally ready to kick on all cylinders is a myth rooted in desperation that tries hard to deny the fact that almost every economy across the globe faces some special problem.

While we were told tax reform would mark a major shift in companies deciding whether to keep jobs here or even bring them back to America that may not happen. This narrative that helped to win passage of the legislation and the many assertions made by politicians and their allies in the world of economics will not in itself lead to more investment. Corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not how much capital is available. In our current cheap and easy money, environment capital is basically free. The problem is not funding new investments, but finding endeavors in which to deploy this capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. Sadly for several reasons stock buybacks has been moved to the front the list of corporate priorities joining other investments that are not productive investments.

The focus of this article is more about the tax reform and why it may not yield all the growth and promises many people feel it will generate. In the defense of many people who got cranked up on what the bill would accomplish we must remember the written details of the plan were not even available until just before the actual vote so they really did not know the devil hidden in the details. While over the years US companies have off-shored their tax books not only because they could but by doing so they saved a huge amount in taxes. Tax rulings have not only allowed this but have also made it easier by allowing legal sheltering schemes like having an Irish subsidiary own the technology patents and then charging your US tax entity a stiff royalty for their use. 

It also appears that wrapped inside and hidden within the tax bill is that any past violations of US tax laws can lead to both civil fines and criminal prosecution for the corporate managers and their legal counsel who designed some of the schemes companies have used in the past. this could prove very important in that the IRS is looking closely at many of the somewhat fraudulent scams used in the past for which no statute of limitations exists. Many analysts have failed to reflect the true nature of offshore tax schemes and how problematic it will be to reverse these complex transactions. To be clear, when the IRS disallows a sham offshore transaction it can be catastrophic and even result in a company having to declare bankruptcy. The implication of the 2017 tax law so far is that it begins a new era for future corporate taxes, but it may also compel recognition of huge past-due tax liabilities in coming years as many previously existing offshore corporate tax avoidance scams become exposed to IRS review. 

An article published by The National Interest delved into what it viewed as a false narrative about lower corporate taxes resulting in the repatriation of trillions in offshore cash. It claims many economists will be surprised to learn that the new tax bill does not actually require repatriation of offshore cash but instead it employs something called "deemed repatriation," which means the IRS taxes you on your unrepatriated foreign earnings whether a company brings the cash back to the US or not. This opens the door to the idea the process of reconciling offshore revenues with an IRS pushing a strong level of enforcement will be very painful for those who have aggressively avoided taxes in the past. Being forced to pay for past sins is unlikely to result in a wave of new corporate investments which increase productivity and economic growth. 

This will become a compliance nightmare for many companies that have participated in past tax avoidance transactions. Many corporate managers and their legal counsel may even approach the IRS and try to cut a deal, it may even result in a "formal tax amnesty" being proposed by the Trump administration. Most likely the government would consider offering an amnesty program only if corporations begin to display a real fear that they are about to be caught up in this vice begin to start screaming at the top of their lungs. It seems Treasury is already working on the implementing regulations for this “virtual repatriation.”

The earnings return provisions of the tax bill are of the highest priority followed by the anti-base erosion provisions, and then the worldwide system on Global Intangible Low Tax Income that sports the great acronym, “GILTI.” The Treasury is putting the "deemed repatriation rule" into place to raise the roughly $200 billion over ten years they need to move to a system which excludes most foreign-sourced active business income from US taxation. This aptly named “participation-exemption system” is something the American business community has been lobbying to get for years. As things stand the Treasury is hell-bent on collecting this money. So much for the idea that the new tax legislation will result in a cash repatriation bonanza that will benefit stock prices and the overall economy.

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