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.

Let’s look at how this bill’s tax increase affects IWC. Right off the top, we’re transferring $150 million of the billion-dollar profit to the government. Lenders base how much to lend on coverage, meaning profits available to service the debt. Less net profit translates into a 15% less borrowing ability. The three billion borrowings become $450 million less. The company is now $600 million short of what is needed to meet demand and keep up with the competition.

IWC is now in a precarious position. It may borrow the difference but at a higher interest rate as it would be less creditworthy. Leverage through increased borrowing makes the company riskier. Forgoing some of the expansion would mean losing out to the competition.

A solution appears. Interests from the nation of Elbonia(a bow to Dilbert and its creator, Scott Adams) offer more than enough incentives and lower costs to offset the effects of the new tax. Of course, the expansion would now take place in Elbonia rather than the U.S. Without any other choice, IWC becomes a major Elbonian employer.

Think this is fantasy? Think again. We’ve seen this movie before. Corporations were leaving the U.S. the U.S. at an alarming rate before the 2017 Act lowered onerous corporate taxes. Previously, similar calculations led to the transfer of so much production overseas—responding to an unfriendly environment here. 

Punishing a company for expanding its production here is an insane idea. Yet, this is precisely what this bill does. You don’t get the write-offs unless you make new investments. Growing companies here is what leads to more economic activity and employment. This outlay leads naturally to increased tax revenue.

Shortsighted beggar thy neighbor attitudes drove many businesses to China and other nations. You can’t tax a company that’s gone. Have we learned nothing?

Businesses go where they can thrive. Implying heavily investing companies are tax cheats doesn’t make them feel wanted or appreciated. One would think those in the administration with long business roots would point this out.

Oh, that’s right. Few people running this administration have backgrounds in commerce. Neither the President nor Vice-president spent any time in private industry. The rest of the cabinet lacks those roots.

This lack of private sector experience shows how far we’ve come from the nation’s inception. Virtually all signers of our Declaration of Independence and Constitution engaged in commerce. It was their day job. Taxes were at the forefront of our reasons to revolt. Now we have people who never had to turn a profit by making tax policies-the new. “Taxation without Representation.”

For an administration that claims diversity, this is a startling composition. Somebody needs to point out to them diversity isn’t only hues. As I have, somebody in the government making simple business calculations might’ve pointed out how self-defeating this bill is. Of course, there is the possibility someone did, but they don’t care.

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