Fiscal cliff or no, Washington faces an urgent need to greatly reduce its bloated budget deficit without starving its already supermodel-thin economy in the process. Wouldn’t it be nice if there was a huge pile of money sitting around, just waiting to be put to work to keep the U.S. economy moving while the government ratchets back its own contribution to the nation’s economy?
Well, there is. It’s mostly sitting overseas. There’s a way to bring it back home that could significantly ease the pain of fiscal austerity and kick-start the stock market at the same time.
By some estimates, U.S. corporations have as much as $1.5-trillion (U.S.) of cash outside the United States. (Other estimates suggest the number may only be half that big – but still, it’s a lot of money.) It’s also estimated that only about 15 to 20 per cent of that money is actually required for investment in those companies’ foreign operations; the rest remains parked offshore simply to avoid the onerous 35-per-cent corporate tax rate those companies would get hit with if they brought the money back to their domestic coffers.
There has been an on-again, off-again push in U.S. Congress over the past couple of years to declare a temporary “tax holiday” to allow companies to repatriate their offshore cash at a greatly reduced tax rate – perhaps as low as 5.25 per cent, provided those companies meet certain job-creation commitments. A recent U.S. Chamber of Commerce report estimated that such a tax break could boost gross domestic product by about $360-billion and create nearly three million jobs. The theory is that companies would invest that money at home, expanding and upgrading their operations and hiring staff.
But there’s a problem: Washington tried this before, and it didn’t seem to work.
In 2004, the U.S. government declared a similar 5.25-per-cent tax holiday, amid forecasts of similar economic benefits. The result was that $312-billion came back into the United States – yet virtually none of it was spent on job-creating business investments. Instead, most of it went to dividends and share buybacks; the companies who repatriated funds, on net, actually reduced their payrolls.
One could argue that a better solution would be if you could just tax all that offshore cash. At the going tax rate of 35 per cent, the tax collected on $1.5-trillion would be $525-billion. That sure would ease the pain of deficit reduction next year, wouldn’t it?
Of course it would. But it’s never going to happen. Companies have no intention of voluntarily repatriating those funds and making them subject to one of the highest corporate tax rates in the world, just to help out the U.S. government; they may be patriotic, but they’re not that patriotic. As long as the current tax rules stand, that money is lost to the United States; it’s just going to sit on foreign soil until such time as those American companies choose to spend it – on foreign soil. It’s useless to the American economy, and of only limited use to the companies and investors in their stock.
With a tax holiday, the U.S. domestic economy would at least see some economic benefit from all that money. Even if companies still used most of that money for share buybacks and dividends, we’re talking about, potentially, a lot more money in a tax holiday today than was repatriated in 2004; even a modest percentage of it spent on capital projects and business expansion would be meaningful.
And there’s reason to think that companies might be prepared to invest more this time around in new and upgraded plants and equipment. Despite increases in capital spending in the past couple of years, capital expenditures by U.S. businesses is still running below pre-recession levels. They have a pent-up need to invest in their businesses – and very well might do so, if the tax-holiday law was structured in such a way as to provide incentives to do so.
And what’s so bad about dividends and share buybacks, anyway? The critics of the previous tax holiday’s lack of job creation overlook the economic benefits and employment growth derived from dividends and share buybacks. Dividends put money directly in the hands of U.S. consumers, who own the vast majority of the shares of U.S. multinationals. Both the dividends and the share buybacks contribute to higher stock values – again, enhancing the net worth of investors, while contributing to stronger consumer confidence. All that leads to more consumer spending. Frankly, given the oversized role the consumer sector has as a driver in the U.S. economy, these might be even a stronger economic incentive from overseas-cash-repatriation than capital investments – especially over the relatively short term of the next year or so, when the economy likely faces the biggest hump to get over.
The Obama administration has indicated that it opposes a tax holiday unless it’s part of a comprehensive long-term overhaul of the U.S. corporate tax system – one that would remove the huge incentive to park funds overseas. Agreed. Do it. The overseas money provides the perfect motivation to win bipartisan support to push through such reforms.