Fiscal Cliff Hang Gliding

by: Wall Street Strategies

By David Silver

The big news yesterday, besides the subpar economic data, was Speaker of the House John Boehner's counter proposal to avoid the fiscal cliff. While I don't think the plan would actually fix many of the problems that we are facing as a nation, it is a great starting point -- much better than the kitchen sink offer from President Obama.

On "Closing Bell" yesterday on CNBC, Bill Griffeth made a great point about why the government is letting the fiscal cliff go to the last minute. He said (and I am paraphrasing), you don't study for a final a year and a half in advance. I thought it was a great point, but at the same time, why does it take a day for each side to bring something to the negotiating table? I have said it before, but I really don't want to know what is going on in the negotiations. If the media knows about it, there are going to be reactions, and then Grover Norquist is going to get more air time blaming some Republicans for turning their back on their party -- when, in reality, these are representatives (and senators) of the American people, not the Republican party.

Taxes, We Talkin' About Taxes?

OK, enough about politics. There was a good article in the Wall Street Journal this morning about the amount of cash that American companies are keeping overseas. Companies in the U.S. have to borrow money at home to pay for share repurchases, dividends, and pension contributions. There is an impressive list of companies that many think epitomize American industry, which have most of their cash overseas:

  • ITW: 0% of its $2.1 billion in the U.S.
  • JNJ: 0% of its $24.5 billion in the U.S.
  • GE: 33% of its $85.5 billion in the U.S.
  • MSFT: 13% of its $66.6 billion in the U.S.

Money that is made overseas, if it wants to be repatriated (essentially, be brought back into the United States), it will be taxed at the corporate 35% tax rate (less the tax rate it was charged where it was earned). I know we are on a taxing binge right now, but why not close many of the loopholes for some of these companies and lower the corporate tax rate. So instead of a company like GE paying no taxes at all, it actually pays a lower rate on the money it earns in the United States and it makes fiscal sense to bring the $55 billion in cash that it is holding overseas home. Many companies are keeping this money overseas to fund growth overseas -- just imagine if that cash was able to be brought home relatively cheaply, how much of that cash could be used to fund growth in this country. This is just the ramblings of one man, but I think my arguments make sense.

Imagine the additional revenue the country could get from corporations that have an effective tax rate lower than Warren Buffet or Mitt Romney. GE's effective tax rate during 2011 (I know, it's old news) was 5%. According to (great website name), the top 10 most profitable companies in the U.S. during 2011 were Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), JPMorgan (NYSE:JPM), Wal-Mart (NYSE:WMT), Wells Fargo (NYSE:WFC), ConocoPhillips (NYSE:COP), IBM (NYSE:IBM), and GE. The following table shows pre-tax earnings, the tax provision (and the tax rate), as well as the actual taxes paid to the U.S. government (effective tax rate).