A Dec. 4 Wall Street Journal article, “Top U.S. Firms are Cash-Rich Abroad, Cash-Poor at Home,” discussed the liquidity problem confronting many of our major corporations. At a time when U.S. companies hold near-record amounts of cash — approximately $2 trillion — many are surprisingly cash-poor at home.
Overseas money cannot be used to cover items such as dividends, share repurchases, debt repayments and pension contributions.
But these overseas funds will not be returned to the U.S. unless we lower our corporate tax rate, one of the highest in the world, and change our tax policy.
Companies keep their cash overseas to avoid paying up to 35 cents in tax on every dollar repatriated to the U.S. Unlike most other countries, the United States taxes profits its corporations earn overseas. The federal tax code defers the tax on the non-U.S. profits until the corporation brings them into the country.
Despite having $37 billion in cash, Microsoft sold billions of dollars in debt to fund dividend payments. Since most of its cash is overseas, it makes economic sense to borrow rather than repatriate its overseas cash, because borrowing costs are much less than paying the taxes.
Intel borrowed $6 billion to pay dividends and buy back stock, although it reported having $14 billion in cash and short-term securities. The Wall Street Journal reported that Johnson & Johnson kept all of its $24.5 billion in cash outside the U.S. GE kept two-thirds of its $85.5 billion in cash overseas.
So much cash is generated abroad in part because multinationals use transfer prices (the pricing of goods and services sold between affiliates of a parent company) to minimize their global tax rate. Then the cash from global operations is parked offshore.
We have a precedent for offering a tax holiday on repatriating overseas cash. In 2004, the Homeland Investment Act temporarily reduced the tax rate on repatriated overseas profits from 35 percent to 5.25 percent. U.S. corporations repatriated an estimated $315 billion in 2004.
Critics of a tax holiday say it rewards companies for outsourcing American jobs. Much of organized labor would even like to see a change in the tax code to make overseas profits subject to U.S. tax even if those profits are never repatriated.
And in his 2012 State of the Union, President Obama suggested that the foreign earnings of U.S. corporations should be subject to a “minimum tax” to prevent corporations from shifting earnings to tax havens. The White House has promised to release details about the level and operation of such a minimum tax in the next few weeks.
In the meantime, many politicians on both sides of the aisle have recognized the folly of “trapped cash overseas.”
Bipartisan discussions are being held on whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings of companies that already have paid taxes to foreign governments.
We need to prioritize policies that encourage repatriation because it could provide a large economic stimulus without incurring further deficit spending. Assuming companies simply return the cash to their shareholders, the recipients of these proceeds could stimulate the economy by either spending the cash or reinvesting it. In an even better scenario, companies could use their repatriated cash balances to hire personnel and make domestic capital expenditures.
In an article by Robert Shapiro, undersecretary of Commerce during the Clinton administration, and Aparna Mathnur, “Using What We Have to Stimulate the Economy,” they wrote, “If those earnings were transferred to the parent companies in the United States, they could fund substantial investment and employment and provide additional liquidity to the strapped U.S. financial system as companies reduce their domestic debt.”
While it’s true companies also are sitting on cash because of a lack of demand, Europe’s recession and concern over the fiscal cliff, a tax holiday would remove a major obstacle to companies bringing home their cash.
My hope is to be able to write a column with the headline, “Cash- rich American companies are in a hiring and spending frenzy!”
Originally published in the Sarasota Herald-Tribune
