Would a Corporate Tax Holiday Help the Economy?

With the news that Apple (Nasdaq: AAPL  ) has finally announced a cash dividend and stock buyback came a recurrence of the plea for corporate tax relief. This "repatriation holiday," as the corporate wonks put it, is something like when your local library forgives fines for a day, prompting the return of boatloads of overdue material. With taxes reduced to almost nothing, billions of dollars would flow back into the U.S. to help float the economic boat. Well, in theory, anyway.

Prohibitive tax rate
The amounts of money in question are staggering: an estimated $1.24 trillion is held in overseas accounts by U.S. corporations, according to Moody's. For Apple, fully two-thirds of its nearly $100 billion in cash is held outside the United States. Other big companies, such as Microsoft (Nasdaq: MSFT  ) and Cisco (Nasdaq: CSCO  ) , each have nearly 90% of their income held offshore, while Oracle (Nasdaq: ORCL  ) has a stash equal to 75% of its wealth overseas, and Google (Nasdaq: GOOG  ) holds a hefty 48% in overseas accounts. A Cisco representative stated that the company has less cash on hand here since this country is where it spends the most. The biggest issue, however, is the loss Cisco would incur if it were to bring that money home.

These heavy hitters are not the only companies with hoards of money outside the United States. A total of 70 corporations contribute to the total, with big names including General Electric, Pfizer, Johnson & Johnson, and Intel among those rounding out the top 10. But while the heads of companies such as Oracle and Cisco have purported that bringing money into this country with a tax holiday could be used for investment in new jobs, research and development, and expansion here at home, history shows that this would probably not be the case.

Apple, Google, Microsoft and Cisco have been the leaders in the charge to coax Congress for a rerun of the 2004 tax holiday, whereby the tax was lowered to 5.25% from 35% and a total of $312 billion in overseas profits entered the U.S. for the first time. Even though scores of lobbyists are working on this problem, no new tax break has materialized. That could be because, despite the corporations' assertions that the funds would help boost the economy, the money was used to pay dividends and buy back stock. Not a bad thing, but not exactly the argument that the lawmakers who have been pushing the tax break have been using in its defense. In a recent interview, Sen. Kay Hagan (D-N.C.) said the holiday would allow companies to "put $1 trillion of foreign earnings back to work in the U.S. economy." Since some of the 800 corporate participants of the last repatriation day have laid off employees, that argument loses some of its persuasiveness.

Would it really help?
Certainly, all these companies have ample funds here in the U.S. that they could use to help with economic expansion and unemployment, if they chose to. They can also institute share repurchases and dividend payments, as Apple just did, or even raise their dividend payments. Despite the high percentage of wealth held overseas, for example, Microsoft and Cisco both have about $6 billion and $5 billion on hand, respectively, to finance any domestic plans they may want to implement. Cisco, meanwhile, found the means to use nearly $7 billion in 2010 to buy back stock.

Both Microsoft and Google have denied that they have the need or the will to repatriate offshore funds. While simultaneously lobbying Congress for a tax break, Google stated in Q3 SEC documents that it planned to use the cash on hand to fund business needs here, and to use the overseas money for offshore investments. Microsoft's filing for the same quarter was similar, with the company stating that there was no need to bring home the cash currently residing outside the U.S. and that its domestic stash would be enough to see the company through.

Investors are learning to flex their collective muscles
While a tax repatriation day would probably behoove investors, and particularly corporate CEOs, it doesn't seem as if the economy as a whole would see any benefit. Since the program would cost U.S. taxpayers upwards of $80 billion -- and there would be no way to dictate to companies how they would have to use the repatriated funds anyway -- it might actually harm an economy just sputtering to life.

There's a valuable lesson from this whole affair, however: Investors have the power to pressure companies to share the pie, regardless of where the cash pile sits. Pleasing investors is, after all, what public companies are supposed to do. Sometimes, all they need is a little nudge to get them moving -- and that's something that investors can take to the bank.

Would you like to learn how to make your own cash work for you, perhaps with an eye toward a comfortable retirement? Grab our free report that teaches you the secrets of building your very own financial cushion today!

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Cisco Systems, Microsoft, Oracle, Google, Intel, Johnson & Johnson, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, Pfizer, Johnson & Johnson, Intel, Moody's, and Apple, creating a diagonal call position in Johnson & Johnson, and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On March 31, 2012, at 10:02 AM, gurbanz wrote:

    How can this cost U.S. taxpayers upwards of $80 billion? This cash is sitting offshore and if it comes home and is taxed at 5.25% that's a giant amount of revenue. If it stays offshore the tax revenue is absolute zero and doesn't put any additional cash into the economy.

  • Report this Comment On March 31, 2012, at 10:57 AM, andresmitchell wrote:

    I guess this is the same theory as trickle down economics - that the rich somehow share their wealth by creating jobs and buying things when they pay no taxes. We know there is no evidence to support this theory - the rich haven't paid taxes since Ronald Reagan decided they didn't have to and it hasn't benefited anyone but them. And I would qualify as "rich" compared to the rest of world (as would most anyone on this site) but somehow I understand that aircraft carriers and bridges cost money. Lower the corporate tax rate to that of Europe and see if these companies are still willing to do their patriotic duty and pay their taxes. No free rides though. They're rich enough.

  • Report this Comment On March 31, 2012, at 12:04 PM, BradReeseCom wrote:

    Hi Amanda,

    According to Cisco's own internal slide on its capital structure:

    Visually, you can see how Cisco after the 2004 tax holiday ramped up the transferring of its U.S. profits to tax havens overseas on an incredibly massive scale.

    http://www.bradreese.com/images/cisco-capital-structure-fy11...

    As of January 28, 2012 according to its most recent Form 10-Q (page 28) filed with the U.S. Securities and Exchange Commission, Cisco potentially owes $3.664 billion in claims, interest and penaltes for allegedly evading import taxes in Brazil:

    http://www.sec.gov/Archives/edgar/data/858877/00011931251206...

    There's no question that Cisco has a well documented history of evading taxes on a worldwide basis, view Bloomberg's scathing report:

    "Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues?

    "Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies -- where their customers and key employees are in reality located -- to tax havens."

    http://www.bloomberg.com/news/2011-06-28/biggest-tax-avoider...

    Cisco CEO John Chambers and his personal financial adviser, Harvey L. Armstrong, were key players in myCFO which sold bogus tax shelters that helped clients shield hundreds of millions of dollars from taxes:

    http://www.bradreese.com/blog/12-12-2011.htm

    On March 15, 2012 Cisco announced it was using $5 billion of its profits sheltered from U.S. taxes to acquire Bermuda tax haven incorporated NDS Group.

    Cisco's Bermuda subsidiary (a shell company registered at the offices of Conyers Dill & Pearman, a law firm in Hamilton, Bermuda) receives the profits from roughly $20 billion in annual Cisco sales and according to Bloomberg:

    "For U.S. tax purposes, profits from the Swiss and Dutch units flow to this shell company, one of hundreds the law firm handles on Bermuda, which has no corporate income tax."

    http://www.bloomberg.com/news/2011-06-28/biggest-tax-avoider...

    Massachusetts State Senator - Jamie Eldridge, has been working on legislation that would hold Cisco accountable for not achieving the number of new jobs it promised in exchange for the tax breaks it received to do so, since Cisco built a campus in Boxborough, MA (which is located in Eldridge's voting district):

    "The promised jobs never materialized, and there was no ability for the state to recapture the lost money."

    http://www.bradreese.com/blog/eldridge-cisco-4-7-2010.htm

    United States legislators and voters need to understand that Cisco is seeking to pay ZERO taxes on a WORLDWIDE BASIS!

    Ireland's corporate tax rate is 12% vs. 35% in the United States.

    Nevertheless, Cisco has successfully avoided paying ANY tax in Ireland too according to Bloomberg's report:

    http://www.bloomberg.com/news/2011-06-28/biggest-tax-avoider...

    U.S. Senate investigative report refutes the job creation claims made by Cisco CEO John Chambers:

    "The 2004 repatriation rewarded corporations that kept substantial funds offshore, and has created a new incentive for U.S. corporations to keep shipping jobs and diverting domestic funds offshore. Data shows that the 2004 repatriated funds flowed largely from tax havens, rewarding corporate behavior that moved funds to offshore locales rather than U.S. plants or manufacturing. The long term consequence of that policy is the current corporate stockpiling of offshore funds in anticipation of another repatriation tax break allowing multinational corporations to use a 5.25% tax rate in place of the top 35% rate that applies to domestic corporations. Such disparate tax rates punish small and mid-sized domestic corporations that don't do business offshore, by placing them at a competitive disadvantage, allowing their competitors to escape paying their fair share of taxes, and discouraging multinational corporations from investing in America. The AJCA's negative effects, in both the short and long-term, provide strong evidence that repatriation tax breaks create unfair tax advantages for a narrow sector of corporations with damaging economic impacts on the U.S. economy as a whole."

    http://www.bradreese.com/blog/10-11-2011.htm

    Sincerely,

    Brad Reese

  • Report this Comment On March 31, 2012, at 12:07 PM, wolfman225 wrote:

    "...the rich haven't paid taxes since Ronald Reagan decided they didn't have to ..."

    You're an idiot. The "rich" (the top 1% and 10%) pay the vast majority of total Federal Income tax, while ~50% contribute absolutely nothing. Get your facts straight.

    "They're rich enough."

    And you are qualified to determine just what "enough" is how? Your jealousy and envy are blinding you to reality.

    BTW, even a majority of the "poor" in the U.S. qualifies as rich, compared to the rest of the world. If you are going to bring in comparisons to the rest of the world to determine who qualifies as rich v poor, it could be argued that we have few truly impoverished people in this country.

  • Report this Comment On March 31, 2012, at 5:12 PM, ALTHOR47 wrote:

    ..."Since the program would cost U.S. taxpayers upwards of $80 billion -- and there would be no way to dictate to companies how they would have to use the repatriated funds anyway....."

    1) I would like to know how this costs taxpayers $80 billion? How can you lose what you are not receiving anyway?

    2) There should be no way for the govt to dictate how companies use THEIR/OUR money.

    I don't get this mindset... I just don't get it.

  • Report this Comment On March 31, 2012, at 7:04 PM, andresmitchell wrote:

    Wolfman, I'm not sure who I am jealous of. Financially, I am in better shape than 98% of Americans which puts me in a good place in the world. I'm not going to lower myself to name calling though, especially when someone presents a well-thought out, well-written opinion. I'm obviously an idiot based on my poor grasp of the written language. This is where we are in this country. If you disagree with an angry right winger (and they're all angry), even if your opinion is fact-based (information is the enemy of the right), you are an idiot. Now an actual true conservative (you know, the kind who thinks that an unfunded war is a bad idea) with great ideas is worth listening to. My values are more old school conservative than not. The right wing in this country has no resemblance to real conservatism. Now, your reading comprehension seems a bit low. When reading, you need to pay attention to the context and placement of an idea. Your anger is blinding you to reality. You are so hell bent on spewing your hate and ideology that you miss important points. Now read it again. When I say "rich enough," I'm talking about the companies mentioned in the article. I just asked my niece to read it and explain to me what I was talking about there. She said "the companies!" in her cheerful enthusiastic manner. She's in 7th grade. Ideology is not the same thing as information. An opinion is not evidence. Everyone who disagrees with you is not an idiot.

  • Report this Comment On March 31, 2012, at 7:29 PM, wolfman225 wrote:

    "Everyone who disagrees with you is not an idiot."

    No, not everyone. DJDynamic disagrees with me all the time. He seems quite intelligent and his opinions are very well reasoned. We simply have differeing viewpoints.

    "If you disagree with an angry right winger (and they're all angry), even if your opinion is fact-based (information is the enemy of the right), you are an idiot."

    All "right-wingers" are angry and "information is the enemy of the right". Thank you so much for clearing that up and validating my original opinion.

    Let's see if you can help me with my comprehension a little more, shall we? I'll ask again, from where do you gain the authority to determine just what constitutes "rich enough" (personal or corporate) and on what objective criteria do you make such a judgement?

    Oh, one other thing, I'm not angry. Actually, I find progressive's insistence on basing their economic arguments on emotion rather amusing, in a pathetic sort of way.

  • Report this Comment On March 31, 2012, at 7:48 PM, wolfman225 wrote:

    We've gone far afield from the theme of Amanda's article: the potential effects of a corporate tax "holiday".

    My (never to be humble) opinion is that it wouldn't hurt, but I don't think it'd create that much of a boost, either. Multi-national corporations have spent decades arranging their financing according to the tax situations in different countries. A temporary easing of the tax burden on repatriated profits would likely be insufficient reason for them to completely re-arrange how they handle their revenue.

    Now, if the structure of corporate taxation was changed in a material way.....? The only way to know for sure is to try it. Lessen the tax burden (rate) here, eliminate loopholes and tax favored treatments of certain overseas corporate investments, while giving full credit for income tax paid to other countries, who knows? They may decide that it's not worth the trouble to continue to "hide" income offshore.

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