Paul L. Caron

Wednesday, October 20, 2010

Cut the Tax on Repatriation of Foreign Earnings to Stimulate the Economy

Wall Street Journal op-ed, The Overseas Profits Elephant in the Room, by John Chambers (Chairman & CEO, Cisco Systems) & Safra Catz (President, Oracle Corp):

There's a trillion dollars waiting to be repatriated if tax policy is right.

During last year's "Jobs Summit," President Obama said he was open to any good idea to get the economy moving again. Today he should be especially so, since Washington's many monetary and fiscal policy decisions have not been able to spur the robust growth or job expansion that we all would like. And yet there is a simple idea—the trillion-dollar elephant in the room—that has apparently been dismissed for no good reason.

One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.

But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.

The U.S. government's treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That's because those countries realize that choking off foreign capital from their economies is decidedly against their national interests. ... Especially with corporate bond rates falling below 4%, it's hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40%.

By permitting companies to repatriate foreign earnings at a low tax rate—say, 5%—Congress and the president could create a privately funded stimulus of up to a trillion dollars. They could also raise up to $50 billion in federal tax revenue. That's money the economy would not otherwise receive.

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That's a jobs bill waiting to happen. If a multi-nat has money sitting offshore and little on-shore, it will invest in more production/service capacity (by building or acquisition) invest where it may deploy 100% of those savings. The U.S. tax system charges that multi-nat 35% tax to reinvest in America. What a terrible anti-job, pro-off-shoring policy.

On alternative to that policy is a current tax on all foreign earnings (subpart F with no exceptions), but that is a crushing disadvantage in the international marketplace. What about a blend-- say 10-15% corp rate, but on worldwide earnings (no exceptions, but FTC still available)? Does that take tax out of the on shore/off shore calculation?

Posted by: guy in the veal calf office | Oct 20, 2010 11:35:09 AM