Widget’s Revenge

Senator Joe Manchin and Senate Majority leader Chuck Schumer have agreed on what they call “the Inflation Reduction Act.” This bill is a slimed down but a still expensive version of the multi-trillion dollar “Build Back Better.” At the core is a minimum of 15% tax on over-billion dollar corporations. The revenue from this tax pays for much of what’s in the legislation.

Democrats and much of the media have applauded this provision as only fair. After all, many big corporations pay no tax. How can that be fair? At least they can give a pittance. !5% isn’t too much to ask from these wealthy corporations. 

Maybe there is more to the story. Let’s look at what I’ll call The Internation Widget Corp (IWC). In my days in Business school, a widget was the stand-in for anything produced. Company A Turns out 100 widgets an hour, but company B only 75. How can B match or exceed A?  

How would this “Inflation Reduction Bill” affect this mythical company? Demand for widgets outstripped production, leading to inflationary supply-chain disruptions. Investment in increased production is necessary to fill orders and maintain the company’s competitive position. IWC will post a profit in 2022 of a billion dollars from selling this essential to many industries.

IWC is investing $4 billion in plant and equipment to meet the challenge. Three billion borrowed. Trump’s 2017 tax reform let it offset its tax liability by rapidly depreciating this investment resulting in zero tax. It’s committing all the company’s profits and the maximum money it can borrow without losing its excellent credit rating.

Expansion means more jobs and economic activity- More taxable income down the road. Trump understood it takes invested capital to create viable employment. Business investment underpinned the Trump boom before the pandemic. In any case, expanding supply to meet demand curtails inflation.

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