A tax holiday for big business that both liberals and conservatives can get behind
Multinational corporations harbor and invest nearly $1.5 trillion overseas to avoid the 35 percent US corporate tax rate. Giving them a 'repatriation holiday' 鈥� a tax break if they bring that cash home and create jobs 鈥� will please both sides of the aisle and the American people.
Santa Barbara, Calif.
President Obama is in a tight spot this Labor Day. The dismal economic climate is going to make for a diminished holiday, and the president鈥檚 much-anticipated September 鈥淛obs Plan鈥� is already under microscopic scrutiny.
After his failure to coalesce the 鈥�Gang of Six鈥� during the recent debt talks, it鈥檚 easy to imagine Joe Biden is more determined than ever to craft a bipartisan solution that addresses anemic job creation and unacceptably high unemployment levels. Let鈥檚 suppose he has been quietly crafting a centerpiece idea to headline the President鈥檚 announcement and that he has penned a memo to his boss.
Here鈥檚 how it might read:
I urge you not to cast aside the one idea that can immediately produce new revenues and new jobs; will re-ingratiate you with the CEO community; can be creatively structured to address legitimate liberal concerns about corporate abuse; and will garner strong support from conservatives who will see it as a 鈥済ood鈥� stimulus program.
Bring home the bacon, Mr. President, the bacon being a big slice of the nearly $1.5 trillion in corporate profits that are 鈥渢rapped鈥� offshore. Bring it home with a 鈥渞epatriation holiday.鈥� But this time 鈥� unlike when your predecessor tried a similar policy 鈥� make sure you require companies to do what they say they want to do, create new jobs. Trust but verify, as President Reagan used to say.
US corporations invest overseas, not at home
Secretary Geithner tells us the multinationals are sitting on roughly $1.5 trillion overseas as a result of (legitimately) dodging taxes on profits earned outside the United States. He also laments how these companies go to great length and cost (lawyers, investment bankers, and bean counters) to outsmart the taxman. True, but they do so because our tax code鈥檚 35 percent rate motivates them to do just that. Second only to 鈥渓ost decade鈥� Japan, America has the highest rate in the world.
These massive stockpiles of overseas funds are not sitting idle. They are building shareholder wealth with more plants and R&D facilities and creating more jobs offshore, serving both international and US markets: 鈥淥utsourcing鈥� as the pundits and critics like to say; 鈥淪hovel-ready鈥� projects to use your quip 鈥� but these investments are not happening here.
When these corporations are not building, they鈥檙e buying 鈥� foreign companies and foreign jobs 鈥� and paying hefty premiums for their purchases. Microsoft in May said it would shell out $8.5 billion for the Internet voice and video business of Luxembourg-based Skype. Last week Hewlett-Packard pounced on the Britain-based software company Autonomy and will pay a tidy $10.3 billion.
Microsoft reportedly has $42 billion cash offshore and HP has $13 billion in its total cash kitty (the offshore amount isn鈥檛 broken out). Tapping into trapped offshore funds is ridiculously tax effective for these multinationals.
Building and buying offshore enhances stock values whereas repatriation of these profits at an unnecessary 35 percent tax burden to do the same at home does just the opposite. Financial patriotism isn鈥檛 on the corporate board of directors鈥� agenda.
Time is ripe for a repatriation holiday
You have gone on record, Mr. President, as saying you will consider the repatriation holiday idea, but only in the context of overall tax reform. With all due respect, you squandered a colossal opportunity to do just that by turning your back last fall on the tax-reform recommendations of your bipartisan Bowles-Simpson Commission. Remember? They suggested that Congress jettison all special interest 鈥渓oopholes鈥� from the tax code (including breaks for corporate jet owners) and slash the corporate tax rate to 26 percent.
Your idea for a 鈥済rand bargain鈥� deficit plan last month took a bite at tax reform, but quickly lost its appetite. And candidly, Sir, the new 鈥渟ix of one, half dozen of the other鈥� congressional 鈥渟uper鈥� committee to tackle budget deficits won鈥檛 even nibble at the idea.
The tax-reform train has now left the station and won鈥檛 return until well after the 2012 elections. So it鈥檚 time for you to get out in front and lead: Offer corporate America a six-month holiday to repatriate offshore profits at a tax rate of 5.25 percent.
To be sure, the Bush administration proposed this idea in 2004 and it 鈥渟uccessfully鈥� brought home $362 billion of offshore profits. But it miserably failed to accomplish its main 鈥渂rick and mortar鈥� goal of building new factories in America.
The legislation was poorly conceived and loosely drafted, and allowed companies to funnel the cash virtually unchecked. Reportedly 92 percent of the repatriated amounts were returned to shareholders as dividends and stock buybacks, and some companies actually shut down US plants and slashed payroll.
President Bush served up a lot of beans but not much bacon.
This time, cook up something that sizzles, Mr. President. Your proposal should link the corporate tax benefit directly and verifiably to new jobs created at home.
How to get corporate buy-in and accountability
Here is the concept: For every $10 million a company repatriates at the lower 5.25 percent tax rate, it will sign on to create a modest, finite number of jobs in the US over one or two years (I defer to your Council on Economic Advisors for the right number). Failure to meet the job creation requirement for any $10 million repatriation slice will kick the tax rate right back to 35 percent.
And don鈥檛 forget to fashion this as a 鈥渘et鈥� job creation proposition, so if layoffs also occur at a corporation during the designated time frame, this will count negatively. Your program will be remembered as 鈥渂alanced,鈥� but one that also satisfies a famished job market.
This idea will quickly produce both real jobs and an immediate flow of funds to our shores: $675 billion in repatriated funds and added tax revenues of $35 billion if we assume 45 percent of the available bacon ($1.5 trillion) is brought home (this is the same percentage from the 2004 initiative) at a repatriation holiday rate of 5.25 percent.
But why would corporations voluntary repatriate their profits at 5.25 percent, when they can harbor them offshore now without paying any taxes 鈥� certainly not the 35 percent corporate tax rate? A number of CEOs, among them John Chambers of CISCO and Jeff Immelt of GE, who chairs your Jobs Council, are aggressively promoting some form of a repatriation plan. Here鈥檚 why.
First, they are running out of uses for their oversized pile of foreign reserves, and there are just so many quality foreign acquisitions out there. In addition, CEOs see the political wisdom of not being branded as unpatriotic 鈥渙utsourcers鈥� in a down US economy. They would be quite amenable to paying a modest 5.25 percent toll charge to have the funds available to use 鈥渙nshore鈥� for new investments and shareholder distributions.
A plan that winds bipartisan support
And what about bipartisan political support? No plan will be politics-free. The congressional Joint Committee on Taxation reports another 5.25 percent tax holiday will cost the federal government nearly $79 billion in lost tax revenues over 10 years. That number is hotly disputed by a center-left think tank, NDN, that contends a repatriation holiday will actually result in a net revenue gain of nearly $9 billion over 10 years.
But the shortcoming with both of these studies is they require predictions on uncertain corporate behavior over a decade. Your plan would essentially nail down real numbers at the onset and leave the imponderables of the 鈥渙ut鈥� years for endless debate by the economists.
If you鈥檙e worried about conservative support, House Majority Leader Eric Cantor, among others, enthusiastically embraces the repatriation idea and will likely hail your program as a job creating 鈥渢ax cut鈥� 鈥� yet one that actually raises tax revenues.
And why not use these newfound tax revenues to fund another of your job creation ideas 鈥� the 鈥渋nfrastructure bank鈥� that is the favorite of the liberals? New York Sen. Charles Schumer (D) has suggested this, and it is a clever way to soften-up some of the 鈥渁nti-repatriation鈥� Democrats who chastise such plans as a corporate 鈥済iveaway.鈥�
This tax holiday idea, Mr. President, is straightforward. Lobbyists on K Street and all the beltway pundits and politicians, not to mention the regular folks with whom you recently 鈥渢ownhalled鈥� in the heartland, will understand it. I believe the corporate community will embrace it along with a reasonable 鈥渜uid-pro-quo鈥� jobs stipulation. If thoughtfully structured without the usual overburdening tax minutia, it鈥檚 something the multinationals can implement immediately.
I urge you to include this idea in the job creation recommendations you present to Congress when lawmakers return next month from their holiday. And be sure to put it at the very top of your list because it is bipartisan, creatively addresses the shortcomings of the 2004 Bush plan, and is precisely what is uppermost in the minds of most Americans 鈥� creating new jobs and revenues.
John Klotsche is a retired tax partner and former chairman of the executive committee of the international law firm Baker & McKenzie. He served as senior advisor to the IRS commissioner from 2003-2008. He now writes fiction and nonfiction short stories.