U.S. Companies’ Cash Is More Patriotic at Home: William D. Cohan
Since U.S. lawmakers are no doubt feeling very sorry for themselves this week -- having to work and everything -- their first order of business should be to gobble up some low-hanging fruit.
Congressional leaders decided to eschew the traditional July 4 recess ostensibly to try to force themselves and their colleagues to come up with ways to begin to close the gaping federal budget deficits -- a virtual necessity if a credit-rating downgrade on the United States government is to be avoided.
The overriding issue is reaching a compromise on a package of spending cuts and tax increases that will allow sparring legislators to increase the nation’s $14.3 trillion debt ceiling before a default occurs in early August.
The stakes couldn’t be higher, of course, for our economy, our standing in the world, our future -- and our lawmakers. So why not get the debate off to a positive start?
There is said to be more than $1.5 trillion in cash sitting in the overseas coffers of American corporations. Why not give these corporations the incentive to bring that money home with a tax break, but in exchange demand that they use the cash to, among other things, build new plants and equipment, hire new employees, and invest in research and development? Call it the Private Sector American Reinvestment and Reinvigoration Act of 2011 -- or whatever you want -- but get it done this week.
Big Money Abroad
Because of the success of American companies in the global economy, they have billions of dollars in cash trapped in the bank accounts of their subsidiary operations overseas. According to the New York Times, Apple has some $12 billion in cash or cash equivalents overseas. Microsoft has $29 billion. Google has $17 billion. Cisco has nearly $32 billion abroad.
If these companies simply repatriate the money, of course, they are subject to tax rates of up to 35 percent. If they leave it and use it overseas, they don’t pay any U.S. taxes on the money. A one-time break on the 35 percent rate -- as occurred most recently with the Homeland Investment Act of 2004 -- would encourage companies to bring the money back home and spend it here while pumping new tax dollars into the Treasury to help reduce the deficit.
Many of these corporations sense the opportunity at hand and are lobbying Congress for a one-time “cash repatriation” tax rate of 5.25 percent. Those against the repatriation tax holiday cite what happened after the 2004 tax holiday as a reason to resist giving companies another break this year.
No New Jobs
“Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained,” according to a June 2009 study of the 2004 act published by the nonpartisan National Bureau of Economic Research.
What happened with the cash? “Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders,” the report found. The pharmaceutical giant Merck repatriated nearly $16 billion but ended up using most of it, according to regulatory filings, to reduce its work force, increase its dividends to shareholders, and buy back its own stock.
While it is regrettable that after 2004 these companies defied the intent of the tax break, there is nothing necessarily wrong with shareholders getting the money. Shareholders spend money, too, don’t they?
Don’t Look Back
Still, rather than obsess about why the 2004 tax holiday failed to achieve its goals, how about learning from that experience to design a better tax break for 2011? Last week, the editors of Bloomberg View suggested that a deal be struck at 15 percent if companies could also provide verifiable job growth over a three-year period, which could generate something like $200 billion for the Treasury if the bulk of that $1.5 trillion held overseas came home.
While unlikely to happen at that magnitude -- tech companies like Cisco and Apple have relatively far fewer workers than traditional manufacturing firms and thus might not be interested -- anything like that kind of money going into the Treasury would help assure increasingly wary investors (and credit-rating agencies) that lawmakers might actually be serious about trying to reduce budget deficits.
It might also help to lower the tensions around the increasingly rancorous debate about whether spending should be cut or taxes raised. (My answer? Both must happen: taxes should be raised on the wealthy and spending should be reduced, particularly in the military.)
Variety of Rates
There is nothing magical about the 15 percent rate proposed by the View editors, or about limiting the tax break to companies that hire new workers. Congress could come up with a variety of reduced rates for companies that pump up research and development or build new offices and factories and a smaller break for those that simply return it to investors.
The point is that those companies that are serious about helping to put Americans back to work and investing in their futures -- as opposed to sitting on piles of cash -- would get rewarded for it. The companies that can’t get their minds -- or their economic analyses -- around the idea of spending their cash in the United States can now either keep it overseas or bring it back home, subject to the regular 35 percent tax rate.
Congress should use its ruined Independence Day holiday to solve our nation’s serious economic problems, and a one-time tax holiday with the appropriate safeguards and incentives would be a great act of patriotism.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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