All the Money in the World

One of the dumbest laws around involves how the United States taxes profits earned by American companies operating in foreign countries. If the money is earned overseas and kept there, the United States often doesn't tax it at all. Yet if that cash is brought back -- "repatriated" in official terms -- it usually gets taxed pretty heavily. As a result, even American companies have strong incentives to invest overseas and neglect their operations at home.

In essence, it means the cash that could otherwise be put to use in the United States is staying away. The better jobs, stronger economy, and improving lifestyles all that money could provide? It's certainly doing that -- for the foreign countries where it's staying.

To understand the effect of this insanity, look no further than the one-time repatriation tax break that existed as part of the American Jobs Creation Act of 2004. All told, somewhere in the neighborhood of $300 billion found its way back into the U.S. economy, thanks to that one-time tax break that let the money come home cheaply.

That's a lot of cash -- money that just scratches the surface of what America is losing thanks to stupid tax laws. To give you an idea of just how big an impact tax laws have on the choices businesses make, this chart shows how much money some firms brought home when given the chance:

Profit from it
Unfortunately, the law that allowed all that money to come back to the United States cheaply has expired. This means that the future earnings those companies make overseas will once again be reinvested abroad. That's more cash drained from the American economy and handed over to the rest of the world.

The real beneficiaries of this idiocy, however, aren't the American companies that are essentially forced to keep their cash overseas. They would have earned the money anyway. The folks who really make out are the foreign businesses that get the expansion capital created by all this mandatory overseas reinvestment. For them, it's new money that they otherwise wouldn't have seen.

Dumb tax laws like this one are a key reason why the rest of the world is gaining at America's expense. Fortunately, you can do something about it. Just because America suffers doesn't mean you have to suffer along with it.

You can profit from this phenomenon by investing in the foreign firms that benefit from America's outrageous tax laws. But if you don't want to go digging through complicated tax policy alone, consider joining us at Motley Fool Global Gains. We can help you figure out how to capture a bit of those billions of overseas profits for yourself with a free 30-day trial. Just click here for more information.

At the time of publication, Fool contributor Chuck Saletta owned shares of Johnson & Johnson. Johnson & Johnson and Eli Lilly are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.