Thursday, April 25, 2013

Another Example of Regulation and Taxes Affecting Behavior

Apple is one of the world's richest companies. In its latest filing, the company states that it has 145 billion dollars in cash or near-cash assets. As of yesterday's close, that means that roughly 38% of the company's market value is in a cash position. Which is ridiculous. So ridiculous that investors have been clamoring for the company to return that money back to shareholders. They finally started doing so in March of last year.

Last year, Apple returned 30 billion dollars back to shareholders in the form of dividends and share buybacks. Yesterday, it announced a 15% increase in its dividend and announced another round of share buybacks. But it's not going to use its 145 billion dollar cash pile to finance these new initiatives. Instead, it's going to raise the money in the corporate bond market and then distribute it back to shareholders.

The reason why it's not touching its cash pile is because most of it, approximately 105 billion dollars, is stashed in its overseas subsidiaries. If the company were to repatriate the money back to the domestic market, it would have to part ways with 35% of it thanks to the US tax code. Because money can be stored indefinitely overseas without incurring a US tax (although it must still pay taxes in the local jurisdiction), it makes much more sense for Apple to borrow the money it uses to pay back investors than it is to use the actual cash it has on hand.

This is the tragedy of US tax law. When individuals and companies spend time and money trying to minimize their tax profile, it robs time and money that could have gone towards more productive activities. Given the fact that there is no good reason for having the US collect a tax on profits earned overseas (with taxes already paid in overseas jurisdictions) and that so many companies keep cash overseas so they don't have to pay a fee to the US government to bring it back home (either to invest or to give back to shareholders), it makes our economy less dynamic, which means slower growth and fewer jobs.

Economists of all stripes will readily agree that higher taxes will reduce the incentives to save and invest. Those who are also progressive will make the argument that if the government can put money to a better, more efficient use, it should raise taxes to do so. But given the fact that we live in reality, where the Federal government has shown itself to be utterly incapable of doing anything efficiently (look as Federal bureaucrats testify before Congress that key parts of the PPACA is not going to be fully functional by the deadlines stipulated by law), it makes more sense to keep that money in the hands of the private sector.

At this point, additional taxes and regulation will first trigger a scramble for moneyed and connected interests to find ways of avoiding them. If they can't avoid them, they will simply cut back and do less. The end result is that the country collectively wastes a bunch of time and money.

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