US companies are making record profits. Hooray! That must mean that new hiring of workers is just around the corner, right? Not so fast, my friend. Workers are expensive, especially in a county without universal healthcare that helps limit rising health care costs. So what’s a company to do? That’s easy: invest in machines, not people. And the machines they are buying are in large part from foreign manufacturers:
Many of the companies that are considering hiring say they are scared off by the uncertain future costs of health care and other benefits. But with the blessings of their accountants, these same companies are snatching up cheap, tax-subsidized tractors, computers and other goods.
“We had an opportunity to buy equipment at a very discounted rate,” Mr. Mishek explains of his decision to make bigger investments in equipment than in workers. “Now that the economy has turned around a little bit, it made sense to upgrade.” […]
To add insult to injury, much of the equipment used to replace American workers is made by workers abroad, meaning that capital spending is going overseas. Of the four pieces of equipment Vista bought last year, one was made domestically. The others came from Israel, Switzerland and Germany.
Let’s me make this perfectly clear. Prices on machines are falling and a company can write off the cost of its capital investment against a business’ taxes over time under our tax laws. While a business can’t write off the cost of its capital investment at the time it buys that machine, it can depreciate the cost of the machine over time and deduct that depreciation (i.e., the loss in value over the useful life of the machine) from the business’ tax liability.
And in many cases a company can take advantage of the little known Section 179 of the tax code (well little known to most working stiffs but not to a CPA who who works to reduce a business’ taxes), to deduct most if not all of the cost of the equipment you purchase in the year you buy it. Let me quote the IRS publication 946 regarding Section 179 which permits a business to take advantage of deducting the cost of the purchase of its machines in the year it buys them, rather than use normal tax depreciation:
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. […]
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
- Tangible personal property.
- Other tangible property (except buildings and their structural components) used as:
a. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
b. A research facility used in connection with any of the activities in (a) above, or
c. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
- Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software.
- Qualified real property (described below).
Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.
- Machinery and equipment.
- Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
- Gasoline storage tanks and pumps at retail service stations.
- Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.
Hiring new employees, on the other hand, doesn’t provide a company with such generous tax deductions. There are no sections in the tax code to let a company depreciate the cost of its labor force. Now many economists claim that these business deductions for capital expenditures, especially for those that are covered by Section 179 and other similar provisions of the the tax code work to increase employment. The theory says that a company that is buying equipment, like a new machine, a new truck, new computers, etc. will have to hire new employees to make use of that equipment.
The theory that equipment purchases leads to more hiring is being put to the test in the current Great Recession and, unfortunately, it has been found wanting. Companies don’t need to hire many new employees because of lot of the machines they are buying are merely upgrades of existing outdated equipment, or they are machines intended to replace workers.
So who is benefiting from the equipment buying binge by US corporations? Well, as I pointed out earlier, it’s often foreign manufacturers and workers for those foreign companies who are reaping the benefit of US corporations who have every incentive to purchase new equipment because the government is effectively subsidizing the costs of those purchases. Companies in countries that either have cheap labor forces and also who have better health care systems in place which substantially reduce the burden on foreign companies of health care costs, like Germany or Israel, which both have universal (and in Israel) compulsory health care systems.
Unlike the United States, corporations do not bear the primary cost of providing health care, and health care is costs constitute a significantly lower percentage of those countries’ gross domestic product as compared to the US. It also bears mentioning that Germany’s trade unions and direct employees involvement in industry through state mandated worker councils has not put that country at a competitive disadvantage with the United States. Far from it.
The Bundesbank raised its forecasts for German growth, saying Europe’s largest economy has entered a broad and prolonged upswing.
Gross domestic product will expand 3.1 percent this year and 1.8 percent in 2012, the Frankfurt-based central bank said in its bi-annual economic outlook today. That compares with a February prediction by then Bundesbank President Axel Weber of 2.5 percent growth for this year and a December forecast of 1.5 percent for 2012. Surveys indicate economic expansion “could even exceed the forecasts in this baseline scenario,” the central bank said.
Germany’s economy grew 3.6 percent last year, the fastest since reunification two decades ago, as booming exports fueled domestic hiring and spending. […]
Unemployment will continue to decline, taking the jobless rate to 6.5 percent in 2012 from 7 percent this year, the Bundesbank said.
Unlike Germany, much of the profits American companies are realizing comes from the firing of their employees. From a NY Times report in 2010:
As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers.
“Because of high unemployment, management is using its leverage to get more hours out of workers,” said Robert C. Pozen, a senior lecturer at Harvard Business School and the former president of Fidelity Investments. “What’s worrisome is that American business has gotten used to being a lot leaner, and it could take a while before they start hiring again.”
And despite being flush with profits, US companies (i.e., the private sector) do not show any inclination to increase hiring as the last of the federal stimulus funding is used up. The results of hiring in the private sector for May of this year is proof of that:
WASHINGTON (AFP) – The US private sector added few jobs in May as employers faced rising signs the economy is entering a soft patch in a long, fragile recovery from recession, private data showed Wednesday. […]
Jobs were lost in the goods-producing sector for the first time after six straight months of increases, falling by 10,000.
The embattled construction industry, reeling from the collapse of a housing bubble more than four years ago, shed 8,000 jobs, reversing April’s gain. Since its peak in January 2007, it has lost 2.124 million jobs.
Something to keep in mind about when your Republican friends say that tax cuts and tax subsidies for the wealthy and for business will be the solution to increasing jobs, while universal healthcare is socialism that will destroy our economy. As always the facts do not bear out their faith that crushing unions, repealing health care reform, destroying the social safety net and MORE TAX CUTS!!! is the solution to all our nation’s problems.
