President Donald Trump really wants U.S. companies to bring home the trillions of dollars they're keeping overseas to avoid a big tax bill. He seems to buy into the idea that these corporations would provide a huge economic boost if they brought money back to the country under a much lighter tax burden.
It's unclear whether this is true. In fact, a great deal of evidence points to this being a flawed belief. But that hasn't stopped current U.S. leaders from calling for a reduction in taxes to help repatriate this money.
"We're going to have a big, one-time incentive rate," Gary Cohn, President Trump's chief economic adviser, said in a television interview on Friday. "There's trillions of dollars offshore. We want to get that back into America. ... We want the companies to bring the money back and put it back into the economy. We want them to create jobs."
Unfortunately, it's not quite so simple. These companies, which include the likes of Apple Inc. and Microsoft Corp., don’t need the cash. To the extent they do, they can (and have) been borrowing the money at historically low rates through the corporate bond market.
Indeed, Apple has been selling bonds steadily, with its total debt more than doubling in the past two years while its cash rose by 33 percent in the period, according to the company's filings. In dollar terms, the company added nearly $11 billion of debt in the most-recent quarter while boosting its cash pile by $10.75 billion. (Just last week, Apple sought to raise an additional $7 billion in the corporate-debt market.) Much of the money raised through debt sales has been used to buy back shares and pay dividends.
Many other cash-rich companies have also been borrowing money at a torrid pace without any apparent need for it. In a sense, these companies have already found a way to repatriate some cash in a cost-efficient manner through bond markets.
Apple CEO Tim Cook essentially acknowledged his company had found a back door to use its overseas cash holdings. "Our good position is we can borrow," Cook told CNBC last week.
The question is, how has all this borrowing helped the economy? And would the benefit be any greater with the introduction of some sort of tax holiday? It's challenging to see how.
If companies haven’t already embarked on big investments, such as buying competitors or building new plants, it’s likely that a tax holiday won’t encourage them to do so. During past incarnations of these brief tax reprieves, an estimated 93 cents of every repatriated dollar went toward repurchasing shares, according to a recent analysis by Raymond James.
There's a lot of debate about how much share repurchases help the real economy. And investors are already questioning the wisdom of buying back shares at such high valuations. Boards of S&P 500 companies are authorizing share buybacks this year at the lowest pace in five years, according to Goldman Sachs data highlighted by the Financial Times this month.
One argument is that the U.S. could at least collect some taxes on this money. But even this isn't such a clear-cut victory. The nation would have to lower the rate enough to encourage companies to bring money back, otherwise they’d have no incentive to do so. And the companies might be forced to invest in more expensive endeavors in the U.S. that slow their growth, reducing their international competitiveness.
In principle, if the U.S. government pushes through a lower corporate tax rate, Apple could pay a lower rate on its $240 billion in cash held by foreign subsidiaries, repay some or all of the company's nearly $100 billion in debt and use its freed-up cash to invest in domestic manufacturing or hunt for a big acquisition Wall Street has expected the company to make.
That scenario is no sure thing. Apple and other U.S. companies have reasons other than simply avoiding taxes to keep money overseas. Many have operations in other countries, including those where labor is cheaper than it is in America, or where their businesses have more potential to expand. Just making it easy to bring the money back doesn't mean these companies are going to change the way they spend.
So as Cohn and other U.S. leaders argue for a tax holiday, keep in mind that this wouldn’t be such an obvious boost for the real economy. It will just be more of the same.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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