Stimulus of $1 Trillion Adds Nothing to Deficit: Frank Aquila
Imagine if American companies could add more than $1 trillion to their domestic coffers in an instant without selling a subsidiary, issuing a single share or incurring a penny of debt.
While every company would no doubt use this cash differently, the windfall could fund a return of capital to shareholders through increased dividends and share buybacks. Or it could be used to repay debt, fund capital expenditures or make strategic acquisitions.
How the companies would deploy the money doesn’t matter. The important thing is that the cash would be put to work. So why hasn’t this already happened?
The answer is clear: U.S. tax policies penalize the repatriation of so-called foreign-source income, essentially the profits earned by foreign subsidiaries of American corporations. This cash pile isn’t being hoarded or held on the sidelines, as many pundits have suggested; rather, it is being kept offshore by our own tax structure.
Unlike most countries, the U.S. taxes the profits earned overseas by its corporations. The federal tax code then defers the tax on the non-domestic profits until the corporation brings those profits into the U.S. Since repatriating these profits means incurring a tax of as much as 35 percent, most overseas profits remain offshore.
Given the weak economy and the debate over the need for additional stimulus and further quantitative easing by the Federal Reserve, bringing home hundreds of billions, possibly trillions, of dollars should be a priority. Although most companies would retain some overseas cash for their non-U.S. operations, clearly most companies have far more cash abroad than is needed.
Repatriation on such a scale would in effect be the largest economic stimulus ever. Not only would the cash go right where it is needed the most — the private sector — but it wouldn’t add a single dollar to the federal budget deficit. Actually, the economic growth created through the use of this cash would generate billions in additional tax revenue.
Most successful U.S. multinational companies face the dilemma: Keep the cash overseas or bring the profits home and pay the tax bill.
This isn’t a merely theoretical debate about tax policy. Last month Microsoft Corp. said it would sell as much as $6 billion in debt to fund dividend payments even though it has about $37 billion in cash and short-term investments on its books. Since most of its cash is overseas, borrowing makes better economic sense because the cost of borrowing is far lower than the tax.
Dr. Pinna says:
The tax code in the U.S. has been manipulated by those firms with the strongest lobbyists.
Although, the transnational firms with the trillion dollars in holdings are holding this money overseas, the important point to note is that it is not taxed.Â It is in no way controlled by any government. As a consequence, these international companies can grow abroad with no benefit to the American tax payer base.
In essence, we have another country, which exists in the unchartered area of off shore banks. The U.S. Government should either tax these profits or remove all taxes and let the money return.