A Bad Sign for the Economy

I don't think readers will be surprised to learn that I don't have any particular moral problem with tax inversions, reverse acquisitions that allow companies to take advantage of lower foreign tax rates.  The US has perhaps the most costly and unwieldy tax code in the world, made worse by our unique insistence on double taxation of foreign earnings that prevents companies like Apple from repatriating billions of dollars.  My tax plan begins with the elimination of corporate income taxes altogether, not only as an efficiency and growth step but as a huge step in fighting cronyism.

So I certainly don't share all this creepy Leftist desire for loyalty oaths and such from corporations.  But I do have a concern about the economy.  Over the past couple of years, it appears that a lot of corporate borrowing has been to:

  1. Buy back their own stock
  2. Reduce their tax rate, in part through inversions (apparently over 2/3 of 2014 M&A volume is inversions)

When the two best investments a company can find are in its own stock and in reducing tax rates, then there appears to be a problem with the underlying universe of investment opportunities.

Actually, the best investment our company has found this year is in closing operations in California and escaping that regulatory and litigation mess.



  1. herdgadfly:

    Next you need a marketing campaign to attract responsible states with Republican governors to adopt privatization of state campgrounds in order to rid the states of public unions. You can start with Mike Pence in Indiana and Scott Walker in Wisconsin.

  2. STW:

    So, your best investment is just a play on #2.

  3. jdgalt:

    A corporation buying back its own shares is not investing. It is (both effectively, and for accounting purposes) giving its owners part of their capital back (which will be taxed as capital gain, but not until each investor sells his shares in the company).

    Up to 1986, Microsoft was known for always doing this instead of paying dividends -- thus allowing its shareholders to pay capital gains rates on their profits. They gave up the practice in 1986 because the (temporary) abolition of capital gains rates made it no longer worthwhile. And when capital gains rates came back, we got the new concept of "qualified dividends" which are taxed at capital gains rates, so it's still no longer worthwhile.

    The big thing that has reduced investment activity in the US, though, is Sarbanes-Oxley. Most companies are going to be privately held from now on, as long as SOX is on the books.

  4. Lorenzo from Oz:

    The US has perhaps the most costly and unwieldy tax code in the world Clearly, you have never had anything to do with the Australian tax system. I present to you the 11 volumes of the Income Tax Assessment Act 1997, as amended. (Previously the 1936 Act.) http://www.comlaw.gov.au/Details/C2014C00468/Html/Volume_1#_Toc393956418

  5. Matthew Slyfield:

    There have always been more privately held than publicly traded corporations. In fact, there are some very large and recognizable corporations (10s of billions of $ in annual revinue) that are privately held and were privately held before SOX.


  6. Bram:

    Well, we have your tax rate beat (39 to 30%). And once you have navigated U.S. taxes and regulations, you get to do it all again for whatever state you operate in - God help you if it's CA, NY, or IL.

  7. Nehemiah:

    I applaud corporations that conduct stock buy-back campaigns from time to time. There are times when the reinvestment of earnings doesn't generate adequate return. Better to release the capital back to shareholders than to incur reinvestment risk.

    However, as Coyote points out, when it becomes one of the dominant strategies in the market, it suggests there are few, if any, investment opportunities where capital can earn its cost. Corporations are probably reacting to all the uncertainty in play today. We may be in for a bumpy ride.

  8. bigmaq1980:

    While you are technically correct on it not be "investing", that is really a "semantical" issue, in context of this post. I read it to mean a use of the cash surplus from operations.

    A company can choose to put those funds into a project of some sort (capital, training, marketing, etc) with an expected return, they can pay down their debt, or they can return that wealth to the owners (dividends, stock buy back, etc).

    And, yes, it is a troublesome indicator that executives are choosing the latter option, as this means they are not seeing the kinds of returns from funding projects to make them worthwhile.

    Rather than singly focusing on SOX, I put the blame on "regime uncertainty".

    We had a huge shake up in 2008, skirting disaster that extremely few foresaw. Then we elected a government that with its rhetoric and actions have maintained, if not elevated, a level of uncertainty around numerous issues with major economic impact.

    Just one example....Obamacare - "...we have to pass the bill so that you can find out what is in it..." - House Leader, Nancy Pelosi ... and ... she was RIGHT!

    There are multiple dozens of examples.