The Overseas Profits Elephant in the Room
October 25, 2010
One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations -- and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.
But for U.S companies such repatriation of earnings carries a significant penalty:
- A federal tax of up to 35 percent.
- This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world -- except here.
The U.S. government's treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of zero to 2 percent.
Many commentators have pointed to the large cash balances sitting on U.S. corporate books as evidence that the economy is still stalled because companies aren't spending. That analysis misses the point. Large cash balances remain on U.S. corporate books because U.S. companies can't spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability, say Chambers and Catz.
- With corporate bond rates falling below 4 percent, it's hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40 percent.
- By permitting companies to repatriate foreign earnings at a low tax rate -- say, 5 percent -- Congress and the president could create a privately funded stimulus of up to a trillion dollars.
- They could also raise up to $50 billion in federal tax revenue -- money the economy would not otherwise receive.
Source: John Chambers and Safra Catz, "The Overseas Profits Elephant in the Room," Wall Street Journal, October 20, 2010.
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