How Cash-Rich Companies Might Repatriate Foreign Profits Tax-Free, Liberating The Nation From Political Gridlock At The Same Time

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Includes: AAPL, GE, MRK, MSFT, PFE
by: Peter Schwartz

Summary

Effective fiscal policy requires imaginative solutions to seemingly intractable political problems.

As of 2013, U.S. corporations had stashed more than $2 trillion overseas to avoid paying U.S. income tax on overseas profits.

Economically disadvantaged students who work hard and achieve at high levels through high school fail to graduate from college at a much higher rate than students from more affluent families.

Congress can encourage repatriation of foreign cash holdings of U.S. corporations and strengthen the U.S. economy and the life opportunities of the most disadvantaged portion of the nation's student populations.

Companies such as Apple and General Electric adopting academic mentoring and skills apprenticeship programs would obtain tax relief benefiting shareholders while strengthening their own, and the nation's, human capital foundations.

Here are a few observations about cash holdings and tax strategies of multinational corporations headquartered in the United States.

  • As of 2013, U.S. corporations had stashed more than $2 trillion overseas to avoid paying U.S. income tax on overseas profits, a 5-year increase of 92 percent.
  • A large handful of U.S. companies (22) have accumulated about 50 percent of this overseas stash. The top five, as of 2013, include: General Electric (NYSE:GE) ($110 billion); Microsoft (NASDAQ:MSFT) ($76 billion); Pfizer (NYSE:PFE) ($69 billion); Merck (NYSE:MRK) ($57 billion); and Apple (NASDAQ:AAPL) ($54 billion). A total of more than $350 billion for these companies alone.
  • The United States corporate income tax rate is 35 percent. The U.S. is also distinguished among advanced industrial nations by the tax liability imposed on overseas profits.
  • One should note, however, that most corporations employ sophisticated tax strategies to avoid paying the full 35 percent on profits (Apple, for example, paid taxes in 2013 at an effective corporate rate of 12.6 percent). Many of these strategies involve clever ways to park domestic profits in other countries to avoid taxation (of which inversion is only the most spectacular), and then equally clever methods to repatriate those funds without paying tax on them.
  • Activist investors want corporations to deploy this cash more effectively, primarily (but not exclusively) by giving more of it to shareholders. In lieu of repatriation, many companies, such as Apple, have issued debt to fund stock buybacks or dividend payments to shareholders.
  • The U.S. Congress cannot legislate effective tax policy, partly because we are in a political season, but also because partisan conflict within the institution has metastasized. Republicans favor a tax holiday and tax reform to eliminate U.S. taxation of overseas profits. Democrats would prefer to remove the option for corporations to avoid taxation on profits retained in overseas domiciles. Some Democrats also favor a tax holiday.
  • Democrats and Republicans might conceivably both support a one-time tax holiday for purposes of repatriation. However, previous tax holidays provide little reassurance about the assumption that companies will deploy repatriated funds to hire more employees and invest in capital equipment and technology upgrades. In 2004, corporations used most repatriated funds to reward shareholders with higher levels of stock buybacks and dividends, often while simultaneously laying off employees.

Here are a few observations about college student graduation rates in the United States.

  • Less economically advantaged students who work hard and achieve at high levels through high school fail to graduate from college at a much higher rate than students from more affluent families.
  • Only one in three students from the lower half of the income curve graduates in six years from colleges with at least a 70 percent graduation rate.
  • Bloomberg Philanthropies leads a coalition of non-profit organizations - including Khan Academy, the College Board, and the Jack Kent Cooke Foundation - that is launching an (initially modest) initiative to provide support and counseling for lower-income students during both high school and college years. The goal of the initiative is to boost the graduation rate of these students from 33 percent to 50 percent in the next five years.

Here are a few suggestions about how Congress might encourage repatriation of foreign cash holdings of U.S. corporations AND strengthen the U.S. economy and the life opportunities of the most disadvantaged portion of the nation's student populations. A win-win!

  • Congress could encourage tax-free repatriation of overseas corporate holdings for any funds reinvested in sustainable, long-term, relationship-driven programs designed to mentor, motivate, train, apprentice, and ultimately employ financially disadvantaged young Americans.
  • Companies could design student mentoring and training programs according to best practices gleaned from existing models and from peer-reviewed research. They also could experiment with programs tied to transparent reporting and knowledge-sharing regimes that would allow private companies, non-profit organizations, educational institutions, and federal, state, and local governments to benefit from models that work most successfully.
  • Companies could tailor programs to commit students they support to working for them for a specific period of time, so they receive a positive return on their investment in this human capital.
  • Companies would likely respond to incentives to achieve better training and employment productivity results than their peers.

Effective fiscal policy requires imaginative solutions to seemingly intractable political problems. Most legislators and business leaders support some kind of tax holiday for repatriating foreign holdings. Most legislators and business leaders more generally support comprehensive tax reform to reduce the corporate tax rate and modify the existing territorial provision that encourages corporate tax avoidance.

At the same time, few among us would argue that the U.S. corporations can thrive going forward, in an intensively competitive global economic environment, without investments in the nation's human capital. Some of us might prefer either the market or the government to address underinvestment in human capital. However, little evidence exists that either the market or the government can at this time effectively address the nation's longer-term human capital and "human infrastructure" needs.

Recent events such as the Ebola crisis disclose the degree to which cash-rich private individuals such as Paul Allen will step into the breach when governments cannot meet their basic (and very much self-interested) obligations to securing the health and welfare of the world's population. One might (and I do) bemoan the recent emergence of a new Gilded Age ethos of noblesse oblige among the nation's super-wealthy, founded as it is on widening inequality. Well-intentioned though it may be, private philanthropy within modern, democratic nation-states can never replace - and in some instances may undermine - a functioning government and robust political institutions.

However, the tax-repatriation-human-capital-investment proposal floated in this essay truly does present an opportunity to forge new kinds of partnerships between governing bodies and private corporations to resolve some of our most vexing economic and political challenges. Companies such as Apple or General Electric that reinvested idle foreign cash in long-term academic mentoring and skills apprenticeship programs would obtain tax relief benefiting shareholders and enormously strengthen their own, and the nation's, human capital foundations.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.