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Monday, November 01, 2010 2:54 AM

Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions

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Reader Jack is interested in corporate cash levels, average hiring costs, and how many jobs corporations might create if they used 1/3 of their corporate cash to hire employees. Jack writes ...

Hello Mish

Corporate America has somewhere between $1 Trillion and $1.8 Trillion in cash judging from sources I consider "reliable," such as The Wall Street Journal, Bloomberg, etc. That it is a heck of a lot of cash.

I hope you might be able to help me in some research I have been trying to do but I have hit brick walls left and right.

What I am wondering is how much does it cost a private sector employer, in either the manufacturing or service industry sectors of this nation today, to bring on one full time equivalent employee for one full year?

The cost needs to include everything, not just the obvious, such as wages, compensations, benefits, and government taxes. Hiring and training.

I know that the employer must have a building to work in or out of, property, plant and equipment. Thus, the employer must meet all of the pre-paid expenses and the overhead that is directly or indirectly associated with bringing on one new full time equivalent employee for one full year.

I already placed calls to the National Association of Manufactures and the U.S. Chamber of Commerce with no results.

If corporate America (not small and mid-size companies) is sitting on a wad of cash between $1 and $1 trillion, I have to believe they could use 33% of this to fully invest and hire American workers at American facilities making and selling American products or services, either domestically or to our trading partners.

To my mind's way of thinking, the entire U.S. "economy" is a function of the number of Americans employed, the average wages they are paid, and their disposable income.

thanks much,

Corporate Cash Once Again

The first problem is that Corporate America is not sitting on that amount of cash that Jack and others think.

Please consider Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company.

I posted a clarification to the above article in Cash Cow: "Who has the Cash?" Followup.

Of the top 50 companies in the S&P 500, net corporate cash (cash minus debt) is negative $749.6 billion.

That number was as of data from Yahoo!Finance, some of it from second quarter. I believe the situation is worse now.

Premise Flawed

Even assuming one could come up with some sort of "average" cost of hire, the number would be useless. What good does it do to figure out the cost to hire the "average worker" if a mining company needs a geologist, Amazon needs a corporate lawyer, or Google needs cloud computing specialists?

Companies hire if and only if they need workers, position by position, not by averages. It only makes sense to hire someone if they produce a positive rate of return.

Hiring for hiring sake would needlessly burn up corporate cash.

Startups are Life-blood of Job Creation

Interestingly, Jack focused on large corporations although small businesses and startups are the life-blood of job creation.

A study by Tim Kane at the Kaugffman Foundation shows that excluding startups, from 1977 on, there would be no net job growth in the U.S. economy!

For more details please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It.

The sad fact of the matter is small businesses have no reason to hire, and given the economic uncertainties, starting a business now does not seem to be the wisest thing to do (at least in a general sense).

Hiring During Schumpeterian Depressions

Inquiring minds will want to consider Anemic Job Creation During The "Schumpeterian Depression" (written over a year ago, well ahead of the curve).
Thoughts on the Schumpeterian Depression

My friend "BC" writes:
During Schumpeterian Depressions, large, cash-rich firms dominate and push increasing scale and standardization, whereas small firms suffer from a lack of capital and a reluctance by banks to lend.

This trend should persist well into the next decade, as deflationary depressions and the associated demographic cycle reduces business start-up activities, and this time around Venture Capital activity.

Also, younger workers of a peak demographic cohort lack the capital and longevity in the occupational structure to have made sufficient contacts and gotten access to capital and equipment in order to reach the necessary critical mass of experience, reputation, and problem solving one demonstrates sometime in their mid- to late 20s to early to mid-30s.

Thus, we are not likely to see a new wave of incremental innovation and new capital formation and business start ups until no earlier than the mid-to-late '10s to early '20s. In the meantime, mass cross-industry consolidation, R&D moving inside large firms, spin-offs, firings, wealth consumption, and shifting composition of household spending led by Boomers in late life will combine to slow growth for years to come.

Moreover it is questionable as to whether China and India can buck the larger demographic and Schumpeterian-curve trends, as they have come to rely so heavily upon US supranational firms' Foreign Direct Investment in plants, equipment, trade credits, and intellectual property. The growth of US and Japanese firms' FDI will likely continue to decelerate with "trade" for years to come.
For more on Schumpeterian Depressions, please see Creative Destruction.

Tax Laws and Other Factors

There are still many other factors at play. Corporations do not exist to create jobs, they exist to create profits. When it comes to hiring, if companies can get a higher rate of return by expanding overseas, that is exactly what they will do, and in fact exactly what they should do.

Unfortunately, tax law is such that it practically begs companies to move both jobs and profits overseas. Those tax laws benefit huge corporations that can take advantage of monstrous loopholes, to the detriment of everyone else.

How $60 Billion is Lost to Tax Loopholes

The US Corporate tax rate is 35%. Care to guess what tax rate Google paid?

Bloomberg reports Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”
Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s length” prices for the rights -- or the amount an unrelated company would.

Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.

After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission.

The IRS gave its consent in a secret pact known as an advanced pricing agreement.
Google's $1 Billion-a-Year Loophole

For an interactive graphic that shows how the strategy works, please see Inside Google's $1 Billion-a-Year Tax Cutting Strategy.
Google Inc. has cut roughly $3 billion from its income tax bill since 2007. It relies on techniques known to tax planners as the "Double Irish" and the "Dutch Sandwich"
Microsoft uses a "Double Irish" structure as well.

Apple, IBM, and Oracle also use tax schemes, but Google is best at it.

Tax Deference

Note that these schemes are actually tax deference schemes, not tax avoidance schemes. The tax has to be paid, eventually, at least in theory. What happens in practice is corporations defer taxes perpetually, until there is some sort of tax holiday given to repatriate taxes.

Technology Cash Cows

Interestingly, a quick check of that first Cash Cow link shows Apple has $46 Billion in net cash, Google $30.1 Billion, Microsoft $30.6 Billion, Cisco $24.6 Billion, and Intel $18.4 billion.

That is a combined $149.7 billion in net cash from those 5 corporations.

Yet, returning to the original premise, just how likely is it for those companies to use 1/3 of their cash to go on US hiring sprees?

Moreover, what does their average hiring costs have to do with average hiring costs in general?

It is simply impossible to equate cash on the sidelines (most of it nonexistent except for technology companies), with potential hiring.

In Defense of Google

Before everyone gets all up in arms about Google, let me point out that Google has more than 20,000 employees, many of them very highly paid. Is that the kind of business you want to punish?

I think not.

Small Businesses Crucified

Small businesses cannot afford the legal teams of Google or Microsoft.

Thus, the real tragedy is small businesses and startups (the very foundation for job creation) get hit with 35% Federal tax rates, and states take another 1%-10% (varies by state), on top of that.


Who wants to start a company in the US, with these disadvantages, with this healthcare mess, with overcapacity nearly everywhere you look, with the likelihood that cities and states will be hiking taxes?

I wouldn't. Nor do banks want to lend in this environment. The risks are simply too high.

Level the Playing Field

The ideal corporate tax rate is 0% but that would not fly in this environment with our deficits.

Rather than overtly punish successful businesses like Google and Apple with higher taxes, I propose slashing corporate income taxes across the board to some extremely low level while penalizing profits held overseas, in a revenue neutral fashion.

This would level the playing field between big and small businesses, encourage small business creation right here in the US, and encourage repatriation of profits earned or held outside the US.

Mike "Mish" Shedlock
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