Apple's $30 Billion Jobs Investment
Did you say "trickle down economics"? Scratch that... it looks like a waterfall.
Apple plans to take advantage of the incentive in the Tax Reform law by paying the 15.5% one time tax on repatriated foreign profits, a tax of about $38 billion. Apple also in tandem plans to increase investment in the US by about $30 billion.
According to a Reuter's news report, when asked whether the job creation announcements were directly related to the Republican tax plan, Apple CEO Tim Cook replied, "Let me be clear: There are large parts of this that are a result of the tax reform, and there's large parts of this we would have done in any situation".
This huge announcement, joining the chorus of the many companies that have announced investment and job creation plans continues to provide credibility to the tax reform law passed through late last year by the Republican led Congress. Importantly as well it suggests that the underlying economics - supply side economics - is very much alive and well.
Revisiting Supply Side Economics
The often derogatory phrase "trickle-down" economics, which is the watered down version of the Supply Side Economics school of thought, sees impediments to economic growth as resulting from the presence of the heavy hand of government in the economy.
High taxes and burdensome regulation reduce incentives to supply in all markets - in labor markets, individuals do not work as hard as they would have since they do not get to keep all of the rewards from doing so. In product markets, production is also constrained because high business taxes and compliance with burdensome regulation serve to keep costs of production very high and additional production in that setting reduces profits.
The solution to this calls for a rollback on those regulations, tax cuts for both businesses and individuals, and less government scrutiny in the private sector. These policies are expected to increase supply in all markets: people work harder, labor force participation rates increase, businesses produce more - all of these result in greater production, job growth, income growth, and higher living standards.
Government revenues may also still increase via the so called Laffer curve effect, where in spite of lower taxes, because of greater work participation and production, the base on which the tax is applied expands. So lower tax rates do not lead to an offset in government spending.
Why is it is called "Trickle-down" then? In theory the expectation is that the greater stimulus comes from where the spending is the greatest - from the wealthy and from businesses. So supply side economics suggests providing a disproportionate benefit to these groups. As the economy benefits the most this way, other groups in society eventually get to enjoy of that overall benefit, as outlined above.
In the recent Tax Reform law this is seen in the way the design explicitly provides benefits to corporations, other businesses and to the wealthier members of society relative to other groups. In spite of this move by Apple, is there a need for excitement to be tempered with caution?
Beyond the Actions and Numbers
I wrote an article here on Walmart's recent move to raise the minimum wage it pays workers to $11an hour and with its simultaneous decision to reduce some of its Sam's Club warehouses suggesting that this may not be Trickle down at play but good old traditional economics. Why might one also be wary here?
Thinking about it, the repatriated foreign profits, while still abroad, represent "untaxed profits" for Apple. Under the old law they were subject to the same 35%, but paid only when they were repatriated back to the US. Suppose Apple was to repatriate their $252 billion foreign profits under the old law, their tax bill would have been $88.3 billion, for which they get nothing. It paid them of course to keep the profits abroad.
There isn't just a new need realized by Apple to build the new campus and invest in the US. In Cook's words, "... there are large parts of this we would have done in any situation". The issue probably was where the funds would have come from.
By paying $38 billion in taxes under the incentivized 15.5% repatriation tax, and investing $30 billion, they spend a total of $68 billion, less than the $88.3 billion tax bill under the old law. As obviously speculated in reports, this allows Apple to proceed with paying dividends to shareholders out of the remainder which includes an added benefit of $20.3 billion.
One thing to keep in mind is that, this is all that Apple needs to do from a PR standpoint, whatever else they get to enjoy from the huge corporation tax cut they get under the tax law, need not go into any explicit job creation investment project.
The foregoing does not suggest that the tax reform policies will not deliver on its promise. I have talked about why one might be skeptical in a different blog post. How it will all play out is dependent on the actual state of the economy and on the choices made by the target beneficiaries.
First, in an economy where we are already at full employment, possibly even below it, incentives to produce may simply lead to bidding wages up among already employed workers, and this in turn will likely see output prices go up as well. So we may see no particular change in overall employment levels and no change in real wages - purchasing power of wages earned.
The counter to this may be that the labor force participation rate increases as a result. This should not lead immediately to wage competition but an increase in employment. Nominal wages may therefore not increase but purchasing power might. I accept that this is a possibility, lending credence to supply side theory.
Second, if the benefits that are provided to the wealthier segments of society do not translate to explicit spending in the economy, then this hampers trickle down. If people are already satisfied with their existing levels of spending, providing them with additional earnings may lead them to simply save or carry out varied forms of financial investing.
Ordinarily such increases in saving should make credit cheaper, but for who? If spending is not picking up, businesses have little incentive to ramp up credit based investment spending. This is perhaps the argument for why tax reform should be targeting those who will actually spend.
Again, I allow for the possibility that the wealthy will increase their spending. I also see the possibility that cheaper credit will still lead to businesses increasing spending, perhaps in anticipation of future spending increases - making hay while the sun shines. If this is the case then supply side theory will deliver on its promise.
The point is we have to wait with baited breath to see how it will all play out, but in all cases, there is no doubt on who continues to benefit in all scenarios - , the corporation, the shareholders, and the wealthier segments of society... hopefully Supply Side will pan out as anticipated.