March 17, 2010
Good Morning:
U.S. Deficits and U.S.
Based Multi-Nationals
Last week I received the
following by e-mail from a reader.
I consider it to be a very well thought out and articulate
commentary. The person who sent it
has given me permission to reproduce it.
"I have been quietly
consuming your emails for some time now and noticed your request for critical
feedback the other day.
With respect to your
comment below on the relationship between U.S. deficits and multinational
residents of the U.S., may I suggest that [as usual] you are right on the money
- literally. For years corporations have enjoyed cherry picking lower
labour rate and lower tax rate jurisdictions for particular activities.
The result has been a migration of the manufacturing sector, and in more recent
years, other high labour cost/ low dollar value add positions (e.g. the call
center exodus) from relatively higher rate tax jurisdictions, such as the U.S.,
to lower tax rate jurisdictions. I have copied one of Canada's leading
tax lawyers in this since he would have far more salient points with respect to
the migration of financing activities and IP warehousing, the juicy P&L
pieces, from higher to lower tax rate jurisdictions.
In a nutshell, it seems
that U.S. headquartered multinationals (like their global counterparts) have
taken opportunities to minimize exposure to the relatively higher tax rate
jurisdictions such as the U.S.. I'm not suggesting the behaviour of these
companies is bad at all, simply predictable. If you don't see any value
for what you're paying, and taxes are typically seen as a necessary evil, why
would you continue to pay more money than what is required? It certainly
doesn't make any sense to shareholders.
From the old days of
economics, and assuming there is at least a conceptual cap on the total deficit
a country can responsibly incur [a conceptual limit the U.S. seems to ignore],
one would predict that the mountainous. U.S. deficit would eventually cause
either higher tax rates or a deterioration in the quality of the available
workforce and supporting infrastructure due to the inability of the government
to maintain sustained program funding to ensure that quality, leading to a
lower demand for the U.S. workforce. Since ineffective education and
health care systems have plagued the U.S. for quite some time, and the States
have demonstrated a consistent inability to ensure adequate continued
investment in hard infrastructure, it may be that the U.S. has understated its
real deficit for many years. It seems folks don't really focus on the
quality, but rather the obvious quantity, of a deficit. Had the current
deficit reflected thoughtful programs designed to put the U.S. at a competitive
advantage, the U.S. would stand a chance of arguing that it would grow out of
the deficit through a robust future tax base. Their deficit has been
created to a significant extent through war and earmarks rather than program
investment designed to produce economic growth.
The U.S. seems to find
itself between a rock and a hard place. While the media sound bites may
be misleading, the clear message seems to be that the U.S. economy is in a
state of unwilling transition. With a climbing deficit, the ability to
fund a positive transition becomes marginalized by the unaddressed legacy
issues of replacing low-value add jobs (manufacturing and administration),
climbing costs of health care insurance and an education system that doesn't
provide a large segment of their population with the tools to obtain real
employment.
In the past it would have
seemed obvious that at some point the U.S. would have to raise taxes.
Faced with higher taxes, multinationals will react predictably, exploring
further the relative portability and relocation ease of operations and
assets. That direct reaction would be evident in the segmented financial
statement information of the U.S. multinational group and would have a
relatively quick and direct negative impact on the deficit. The U.S.
could, and to some extent has, focused on the U.S. headquartered management of
these companies. Assuming the cache of "American" based is important, the
U.S. may need to expand this focus on the captive tax revenue source of U.S.
based management. It would be difficult to imagine that a higher tax rate
for salaries in excess of some amount ($500 thousand, $1 million?) would cause
significant backlash from U.S. voters. Unfortunately this approach lacks
imagination, the heft to make a meaningful dent in the problem and does nothing
to create an economic environment that attracts replacement of business and
real employment. Stalemate.
At a minimum, large
deficits create uncertainty. We can hope that administrations proceed in
a prudent and appropriate manner but we have seen too many examples of the
opposite to be sure of prudent decision making by governments. We also know
that uncertainty is anathema to multinational corporations who get pummeled by
the market when they miss a quarter by the slightest of margins. With no
clear fix, and a large degree of uncertainty, it would be hard to imagine that
U.S. multinational decision-making is unaffected with respect to the expansion
or continuation of U.S. activities. The small bright spot is that these
corporations don't have anywhere else to run, really. We'll have to watch
the geographic segmentation piece of the financial statements to see what
happens.
It's not pleasant watching
a super power descend to more modest levels.
Again, thank you very much
for your emails and congratulations on the continuing, important evolution of StockResearchPortal.com."
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I encourage others to write thoughtful commentary
they would like to have me consider for similar publication - either with or
without being identified as the author as they elect. I assure you that disagreeing with the views I express in my
e-mails will not be seen as a negative.
In fact, I would see well-considered disagreement positive as I am
interested in exposing StockResearchPortal.com Subscribers to a 'balance of
views'.