Come Home, Dear Cash

Here's the problem: Big businesses have tons of cash, yet most of it is parked abroad. Worse, they have every incentive to keep it there.                                             

Under the current tax code, profits earned abroad are first taxed at the foreign country's tax rate, then again at the U.S.'s tax rate if those profits are brought back stateside (minus an allowance for foreign taxes already paid). It's called the repatriation tax, and it's arguably the biggest reason companies have massive offshore cash hoards -- more than $1 trillion at last count. Since most foreign countries have lower statutory corporate tax rates than the U.S, the allowance for foreign taxes already paid doesn't cover the 35% repatriation tax, so the IRS comes a'knocking when foreign profits are brought home to America. Thus, they hoard them abroad.                    

And those hoards are growing fast. Bob Doll of BlackRock made an interesting prediction recently: Over the coming five years, 70% of earnings growth among S&P 500 companies will come from abroad. When most profit growth is abroad, and we give companies an incentive to keep those profits abroad, no one in America wins.

One solution is a repatriation holiday that lets companies bring foreign profits home at a one-time lowered repatriation tax rate of, say, 5%.

It's been done before. In 2004, a short-term repatriation holiday lured $300 billion from overseas corporate accounts back to the U.S -- about five times more than the previous year. Doing something similar today could be a huge injection to the U.S. economy. The 2009 stimulus package was a little under $800 billion of tax cuts and spending initiatives. A repatriation holiday today could harvest a hoard of cash equal to a good portion of that amount. And since most of this cash would likely stay abroad without a repatriation holiday, the impact on the Treasury's coffers is minimal.

But hold the phone, some say. The 2004 holiday wasn't all it was cracked up to be. So argued the Tax Policy Foundation this week:

A tax holiday on repatriated funds is a proven failure -- expensive in both direct and indirect ways. It was already tried in 2004 and didn't work ...

[F]irms are unlikely to invest the repatriated funds. Congress passed a similar repatriation tax holiday in 2004 and required firms to create domestic jobs or make new domestic investments to get the tax break. Nonetheless, the firms, on average, used the tax break to repurchase shares or pay dividends -- not to increase investment. 

The holiday, instead, turned into a massive tax break for shareholders -- resulting in little or no economic gain or job market expansion. Why? Because money is fungible, to satisfy the requirements of the law, corporations reported repatriated funds as the source of money for investments or jobs they would have created anyway -- and used other funds to increase shareholder wealth. 

They're right about one thing: The repatriation holiday wasn't a direct boon for jobs or investment. A Harvard study analyzing the 2004 holiday found that "a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders."

But calling that a failure sets up a false dichotomy. Yes, jobs are the most pressing issue our economy faces. But that doesn't mean every policy that doesn't create jobs has failed. If I'm seriously ill, overcoming that illness may be the top priority, but that doesn't mean getting a haircut is a failed idea. The problem with the 2004 holiday is that it was labeled a jobs plan, when those drafting the bill had to know otherwise. Companies that want to expand -- particularly large corporations -- can raise capital. Repatriating cash is almost always a shareholder-centric move.

The question that should be asked is: Is this money better off in a bank account in Geneva -- or New York? Even if all repatriated cash goes toward dividends and buybacks, it's still better than sitting idle overseas. And this isn't a move that would only benefit the wealthy. Roughly half of all American households own stocks, either directly or through mutual funds. Companies like Oracle (Nasdaq: ORCL  ) , Microsoft (Nasdaq: MSFT  ) , Intel (Nasdaq: INTC  ) , and Cisco (NYSE: CSCO  ) all hold billions in cash offshore. All will, in all likelihood, keep most of that cash abroad as long as there's a repatriation tax. And all would, in all likelihood, increase dividends and buybacks if there were a tax holiday. How is that a failure again?

Some say we can't have a holiday because it gives companies the impression that there will be more in the future. And you know what? Good. We should ask why we have a repatriation tax at all. It's an anchor in a global marketplace. Many developed nations, including France, Japan, Canada, and Germany, use a territorial tax system, in which profits are only taxed where they are earned, not transferred to. Switching America to a similar system has bipartisan support -- backed by both the Republican chairman of the House Ways and Means Committee, as well as President Obama's deficit reduction committee.

What do you think should happen? Sound off below.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Microsoft. The Fool owns shares of and has created a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Microsoft, Cisco Systems, and Intel, as well as creating a diagonal call position in Microsoft and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 3:48 PM, ionthemarket wrote:

    I just don't see any downside to this idea. We need to work harder at keeping more of the money in the country. It is bound to help stockholders and the economy in general. When I look at a technical chart on Oracle for instance, it is one thing to look at it today and consider that it might be a good time to put some more money there but it is another thing entirely when the company keeps more of it's capital in the States.

    http://www.moneyshow.com/image.asp?imgSrc=DailyCharts/charts...

  • Report this Comment On June 29, 2011, at 4:04 PM, markchatham wrote:

    Great article, but forgot the other side of the equation... What happens if these companies do not repatrate as cash....

    In the early days of working in China the companies were not allowed to take dollars out. What did they do? They manufactured cheap products in China (Using their Yuan from China operations) and sent the finished goods to other countries for cash....

    They will do the same today.... If it is 35% to get profits back v.s. small tarriff to bring finished goods in???? It is simply setting up the triagle trade again....

    This time however the jobs are gererated overseas, and over time those companies will not be exporting products here (Due to the complicated manuvers to get profits back....) they will just make the products overseas.... And sell them here (since the profits from the sale remain here...)

    So what's better for America.... Giving up a one time tax... Which if returned to shareholders would just be taxed through the shareholder's increase in profits (To a lesser rate agreed....) or to have those resources to develop other forign businesses to compete against ours here...

    Whose side is our government on anyway???

  • Report this Comment On June 29, 2011, at 5:34 PM, NJMCCCFP wrote:

    M Housel has it right. Read the Tax Foundation's position. Just more statist pap. Every bit of income must have the government getting it's share first. Money that goes to the stock holders gets taxed also and gets put to work in the economy that way in a more efficient fashion than the unearned EIC. It is not wasted.Our double taxation of dividends is sick and counter productive. Dividend income should be taxed at the recipient at his/her rate as with REITS. These dividends if paid should be taxed the same and the US will get it's share. Currently 35% of zero is zero. How stupid and short sighted can they be? Fairness does not mean that you get a piece of someone else's earnings just because you exist.

  • Report this Comment On June 30, 2011, at 12:53 AM, Estrogen wrote:

    Morgan,

    Keep up the good work in regards to macro economic situations effecting our country. You make a lot of sense. Thanks.

  • Report this Comment On June 30, 2011, at 9:30 AM, griderX wrote:

    Perhaps Obama will use this as his "hidden ace" to win the upcoming election? ;) I'm pretty sure no one on an investment site will disagree with you bring the money home and shareholders will get rewarded.

  • Report this Comment On June 30, 2011, at 10:54 AM, David369 wrote:

    In some cases those shareholders will use that "extra" money to buy stuff that they wouldn't have otherwise bought thus stimulating the economy. Good article, good comments all.

  • Report this Comment On June 30, 2011, at 4:08 PM, Chontichajim wrote:

    I agree we should not be overly "hung up" on the way money returned to our country is used, any tax holidays have some value. A flatter corporate rate with fewer exceptions may also help by not having conglomerates figure our which income to keep in U.S. (probably the things we tax exempt) and what income to keep overseas at lower rates.

  • Report this Comment On July 02, 2011, at 4:05 PM, einzling44 wrote:

    Not only would US companies bring their cash back home but many big international companies would boost their presence (and create jobs in the process) in the US if corporate taxes were at a more reasonable level. The fiscal deficit would shrink as a consequence.

  • Report this Comment On November 21, 2011, at 7:02 AM, jargonific wrote:

    They could repatriate the money and attach strings. that'd make a big difference though 'free market' junkies would be upset. It's just a term people. Meaningless for average people unless you look at the downside. That is certainly proven. By giving major corporations the 'freedom' to do whatever they wish globally you make average people all over the world far more vulnerable. In Spain they seem to feel that putting in a right wing leader will help. Hardly. That will just help the cycle of theft from the people of Spain.

  • Report this Comment On November 22, 2011, at 6:16 PM, Diditonce wrote:

    I say repatiriate the money at a 5% tax rate for the company with some strings attached. One being the company must spend the money either in expanding or return it to share holders. If some of my holdings such as PFE, BMY, CSCO and etc. returned some of the cash to me the governmnet will get 15%. If my math is correct 5% repatiriate tax plus 15% dividend tax equals 20% for the government. If memory servers me correctly I learned in the 3rd or 4th grade that 35% of zero. It appears congress hasn't gotten into higher math. What are they waiting for?

  • Report this Comment On November 22, 2011, at 6:19 PM, Diditonce wrote:

    Sorry I didn't proof read. It should have been "35% of zero is zero"

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1513527, ~/Articles/ArticleHandler.aspx, 10/2/2014 8:34:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement