Overseas-Profit Tax Cut May Do More Than QE2: Chart of the Day

Giving companies a tax break on transfers of overseas profits may pack a bigger economic punch than bond buying by the Federal Reserve, according to Thomas J. Lee, JPMorgan Chase & Co.’s chief U.S. equity strategist.

Earnings that U.S. companies retain outside their home country total at least $1.4 trillion and are rising by more than 10 percent a year, Lee wrote yesterday in a report. The data were compiled by JPMorgan from annual filings by 883 companies.

As the CHART OF THE DAY illustrates, domestic companies count on business outside the U.S. for a growing percentage of their profits as well. The first-quarter figure was 25 percent, up from 16 percent five years earlier.

Companies may bring home as much as $1 trillion for stock buybacks, dividends, hiring and other reasons if a plan to cut the tax rate on overseas earnings temporarily becomes law, Lee wrote. The Fed’s second round of quantitative easing, due for completion this week, totaled $600 billion.

Senator Charles Schumer of New York signaled last week that Democrats might back a proposal to trim the levy to 5.25 percent from 35 percent. A similar move in 2004 produced $362 billion of inflows, Lee’s report said.

Technology companies are among those with the most money available to transfer back home. Overseas cash balances of the industry’s largest companies may double in the next two years, according to Moody’s Investors Service. The estimate was made yesterday and covers Google Inc. (GOOG), Microsoft Corp. (MSFT) and others with investment-grade credit ratings.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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