Tuesday, May 7, 2013

The Dallas Fed Manufacturing Survey and Chicago PMI both fell

            … in fact, the former posted one of its largest drops in history, with all components sagging. Meanwhile, the latter dipped into contraction territory.

Both of these measurements reflect the same trend… manufacturing in the U.S. is slowing. Part of this is because of the slowdown in Europe. Part of it is because of the slowdown in emerging markets due to lower commodity prices. But we can’t overlook our issues here at home. Our tiny steps toward financial responsibility, in the forms of the payroll tax, higher income taxes, and sequestered budget cuts, do affect the economy. In a global sense, we’re all in this together. And it’s going to take some time to work out.

But even with the increase in taxes, it’s possible the government may end up with less tax revenue. In response to the higher taxes, rather than produce goods and services, corporations find it more profitable to engage in tax avoidance. This is exactly what we saw with Apple (AAPL) last week…

Apple announced that it has roughly $140 billion in cold, hard cash. Sure, it might be held in short-term securities for cash management purposes, but generally speaking, Apple can get its hands on 12-digits worth of cash when it wants to. That’s a lot of power. Given that there are not many good uses for over $100 billion right now in terms of acquisitions or other corporate actions, Apple also announced a $55 billion buyback program. This will lower the number of Apple shares outstanding, thereby making the remaining shares worth more. It’s kind of a back door dividend.

You might be forgiven for thinking that Apple will use its existing cash to make the buyback. It won’t. Instead, it became the largest private issuer of a single bond offering in history by raising $17 billion in the debt markets. Why would someone with $140 billion cash need or want to borrow $17 billion? Simple: taxes.

Apple has less than $50 billion in cash in the U.S., the rest is overseas. If Apple wants to bring back the $17 billion to augment its domestic cash, it would have to pay taxes. So to net $17 billion, Apple would have to bring back $26 billion and pay $9 billion to Uncle Sam. That’s a lot of tax. Instead, Apple simply borrows the money locally, writes off the interest expense, and forgoes U.S. taxes on its big, overseas cash stash for another day!

I’m not saying this is bad. In fact, it’s Apple’s job to manage down its tax liability the best it can. Given the current set of rules, it was a brilliant move. I bring this up simply to point out that our current tax structure is woefully inadequate for today’s business world. Corporate taxes here at home are high compared to other countries, but the tax code makes it easy – and beneficial – for corporations to avoid these taxes. It’s time for an upgrade.

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