In my article "Is the U.S Encouraging Blue Chip Corporations to Hoard Cash at Taxpayer Risk", I discussed reasons for the rapid increase in cash on non-financial corporate domestic balance sheets. Not reflected in this amount is a substantial additional amount of cash held by U.S.-based multinational corporations in overseas accounts. Corporations are not repatriating this cash as doing so would trigger a taxable event with the 35% U.S. corporate tax rate being applied.
In 2004, the government enacted a repatriation tax "holiday" that resulted in $362 billion being repatriated. Notwithstanding, as discussed in an article posted on politico.com, there are conflicting versions of whether this holiday resulted in the desired economic effects, particularly job creation. Now there is once again momentum towards another tax holiday, but it is uncertain if sufficient support exists in Congress to enact it. Several weeks ago, I developed the following idea for a targeted repatriation holiday, one that would tie job creation directly to the tax reduction resulting from such a holiday. I present it to you here:
A Proposal to Entice Large Corporations to Repatriate Overseas Cash Holdings and Create Employment
· A significant amount of cash is held overseas by U.S. based multinational corporations due to the negative tax impact of repatriating the money to the U.S. created by the relatively high 35% corporate marginal tax rate. Microsoft (NASDAQ:MSFT) recently disclosed that it alone holds $50 billion overseas.
· Unemployment remains unacceptably high in the U.S. and the government is unable to provide fiscal stimulus due to budget constraints and political and philosophical grid lock...other sources of capital must be freed up.
· Corporate overseas cash is one of the largest source of readily available private capital, but the government needs to take action to motivate corporations to repatriate this capital while making sure the motivation it provides directly encourages job creation.
· For each $150,000 a corporation repatriates in 2012, the government would issue a "Job Growth Certificate" (JGC) to the corporation (some minimum repatriation amount required).
· This certificate would entitle the repatriating corporation to receive a fixed tax credit of $7,500 per year for five years ($37,500 total) for each U.S. employee it adds and maintains through the five year period over an established base level (i.e net job creation). The maximum per employee credit would be limited to the number of certificates held by the corporation.
· This would create the potential for a corporation to reduce effectively, from 35% to 15%, the marginal tax rate it is paying to repatriate the money (the $37,500 credit is 20% of the $150,000 repatriation increment).
· A targeted repatriation amount of $300 billion would result in 2,000,000 JGCs being issued.
· These certificates would be transferable so that if the repatriating corporation cannot use all its JGCs, it can sell them to another corporation at a secondary market-determined price. This would help maximize the employment impact of the program and allow jobs to be created naturally in the corners of the private sector where they are most needed.
· The repatriation of $300 billion would actually reduce the budget deficit in 2012 by $105 billion by virtue of payment of the 35% taxes owed on the repatriated dollars (understanding this is really a frontloading of future taxes due, not "new" revenue).
· There is no material upfront cost for the program other than design and implementation costs.
· If qualified jobs are added at an average salary of $50,000 per employee (roughly the current national average salary), payroll taxes for each average employee would total $7,550 (assuming the payroll tax holiday is no longer in effect) and income taxes $4,000 (a rough estimate) with the total of these two exceeding the $7,500 credit by roughly $4,000 per employee. Multiplied by 2,000,000 JGCs, net additional annual tax revenue would be $8 billion or $40 billion over the five years.
· If a repatriating corporation or its successors are unable to increase their employment sufficiently or to sell excess JGCs, the government will not be required to pay the tax credit on unused JGCs, therefore the "worst case" is that the government simply collects taxes on the repatriated dollars.
· The unemployment rate would drop by approximately 1.25% to below 8% if 2,000,000 jobs are actually created by this program.
· Using a fixed (as opposed to a percentage) credit favors the addition of moderate wage middle class jobs.
· The need for unemployment benefits and other subsidies supporting the unemployed will be reduced.
· Typical macroeconomic multiplier effects associated with employment tax credit programs - boosts to the housing market, consumption, spillover increase small business performance and employment should be expected.
· Extended five year program gives the economy sufficient time to recover from the continuing deleveraging cycle so it will be prepared support acceptable levels of employment without the need for subsidies.
I think this plan might be even more effective if it was tied to an actual reduction in the upfront tax, perhaps from 35% to 25% as it would provide a stronger motivation to companies to participate in the program, but I leave this for separate consideration. I welcome criticisms of this plan, but more importantly, I would enjoy seeing other creative ideas from the SA audience as to other innovative policy initiatives that could be undertaken to motivate corporations to start investing their vast excess cash, foreign or domestic into the U.S. economy. Maybe the grass roots can break the grid lock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.