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We've written here before about the enormous amount
of cash that is sitting idle overseas, because the companies involved don't want
to pay the stiff tax bill that would result from repatriation. Most of the
large corporations with sizeable international divisions – Microsoft,
Pfizer, Oracle, Apple, Cisco, and the like – have enormous amounts
stashed outside the country. They've been lobbying Congress hard to give them
a tax holiday during which they could bring the money home untaxed, or taxed
at a reduced rate.
On the face of it, it seems to make a lot of sense.
All of those dollars are doing little if anything to revitalize the domestic
economy, and the companies involved have been arguing that they could help
kick-start things if they were reinvested here.
The pushback has been strong, however. The Obama administration, along with most Democrats, are very
sensitive to the record profits some companies have been posting in the midst
of a recession. They don't want to be seen as giving some high flyers a tax
break that is going to be painted as a giveaway among their base supporters.
Plus, they fear that a move like this will just encourage companies to
restock their overseas coffers as they await the
next holiday.
However, the logjam on this issue may just have been
broken. Last week, the bipartisan Senate duo of John McCain (R-AZ) and Kay
Hagan (D-NC) joined forces to co-sponsor a new bill called the Foreign
Earnings Reinvestment Act of 2011. It would temporarily tax earnings
generated internationally at rate of 8.75%, as opposed to the present
liability, which runs as high as 35%.
Sen. Hagan estimates that "a trillion dollars
is locked out overseas. This is truly an opportunity to inject that into this
anemic recovery." McCain added that the bill projects to pump between
$50 billion and $80 billion of tax revenue into the US Treasury, while
spawning two million new jobs.
Their bill is not the first shot fired at this
issue. In fact, there have been four other tries by members of Congress to
get repatriation legislation passed. But this one might just have the best
chance.
Objections cited against the other such bills
reference a similar 2004 tax holiday, championed by President Bush, that produced little job creation. Most of the money
was paid out as dividends and bonuses or used to buy back stock. The
McCain-Hagan bill addresses some of the perceived deficiencies of the 2004
plan, offering additional incentives for companies to create new employment
opportunities, while imposing penalties on those which repatriate earnings
but slash jobs. If businesses add to their employee base, increasing
"qualified payroll" by 10% or more, they can cut their taxes on
foreign earnings even further, to 5.25%. But if they merely pocket the money
while their payrolls shrink, their gross income for tax purposes is increased
by $75,000 per job loss.
Five other senators – one Democrat and four
Republicans – immediately signed on to the plan.
It would likely be a popular bill in the House, but
prospects of getting it through the Senate remain daunting. Majority leader
Harry Reid has said it can't be passed as a stand-alone, although it might
succeed in conjunction with other measures that Republicans would probably
oppose, such as new infrastructure investment. (New York Sen. Chuck Schumer
said back in June that Democrats might be open to using the short-term
revenue provided by a corporate tax holiday to finance an infrastructure
bank.) For its part, the Obama administration has said it will consider
changing the tax treatment of foreign earnings only if it's tied to much more
comprehensive corporate tax reform.
In an attempt to blunt opposition, McCain said the
bill would be offered as an amendment to President Obama's jobs package when
that measure arrives in the Senate, if Democratic Senate leadership does not
on its own include the tax provision in the package.
While the McCain-Hagan bill faces a rocky road, the
growing bipartisan consensus for repatriation likely means some variety of
tax holiday will be enacted, perhaps before the year is out.
[No doubt
about it: political moves can have long-lasting investment implications.
That's why the team of writers for The
Casey Report diligently watch and think about trends worldwide, in
order to bring subscribers actionable investment advice. You can kick the
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