Business Reinvestment and Probable Economic Growth

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The first item from Ted Nesi’s weekend column suggests that the initial corporate statements of good intent following the GOP tax cut were not merely a few instances of political favors:

In Rhode Island, the political battle lines on the new tax law are clear: Republicans mostly like it, Democrats definitely don’t. While the measure’s poll numbers are currently mixed at best, supporters say they think that will change once its provisions start to go into effect next year. For now, multiple companies have quickly announced special employee bonuses since the bill’s passage. So what do Rhode Island’s biggest employers have to say? CVS Health cited comments last month by its CFO, David Denton, who told investors that lower taxes would allow for “a lot of investments that we think we can make that can more rapidly expand our business model across the country.” The Woonsocket company has long paid more than many big companies because of its domestic-focused operations; in fact, CVS estimates it paid nearly 1% of all corporate taxes paid in the U.S. last year. Citizens Bank’s CEO also expressed optimism about the tax changes in a recent interview with American Banker. Most other major local employers said they had no comment on the tax law, but one that did was Amica Mutual Insurance. “Predominantly most of the existing industry tax requirements were maintained, and the current maximum tax rate was changed to a rate that is now competitive with most other industrialized nations,” Amica spokesman Brendan Dowding reports. “For Amica, a lower tax rate will support our continued capital investments in technology and help fund our growth initiatives, which we expect will create job growth within our company.”

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Companies are in business to turn existing resources into bigger future profits.  If a company cuts up unexpected money as gravy for its owners, it is essentially saying that every profit-supporting part of its business — from employees to infrastructure to public relations — has already been maximized, which is almost never going to be the case.

When I sold fish off a truck back in New Jersey, my boss had a friendly professional relationship with the partners in a car audio installation shop down the road.  He once observed to me that whenever he paid them in cash for their services, they divided the bills in two and put it in their pockets as personal spending money.  That’s a rational thing for an employee to do, but (my boss insisted) business owners ought to invest money back into their businesses.

In other words, the lesson was that money put toward the advancement of the business would be more financially beneficial in the long run than just taking the cash, even after discounting it for the taxes.  Of course, for two guys with a tiny word-of-mouth storefront, any given wad of cash might in fact be more beneficial if spent with tax avoidance, but for the larger companies that will reap the largest direct rewards from the GOP’s tax cut, the balance shifts the other way.



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