$1.95 Trillion. Trillion with a “T”!
That’s how much money American corporations are holding outside the U.S. It’s an outrageous sum, and it rose by 12 percent in the last year. Companies as diverse as Apple (Weiss Ratings: AAPL, A), General Electric (Weiss Ratings: GE, B+), and Pfizer (Weiss Ratings: PFE, A) are literally swimming in Benjamins.
There’s just one problem: All that dough is parked overseas.
The biggest corporations in this country don’t want to bring it home — to build factories, invest in research and development, hire workers, or pay generous dividends or buy back stock for shareholders — because if they do, they’ll get socked with a mammoth tax bill. After all, the U.S. corporate tax rate is 35 percent, the highest in the developed world.
Cheap interest rates are also fueling the trend. Companies can borrow money at rock-bottom and write off the interest as a business expense, then use that money to buy back stock rather than spend their cash.
But now, there’s movement afoot in Congress to bring those dollars home. Both Democratic Senator Harry Reid of Nevada and Republican Senator Rand Paul of Kentucky are pushing the idea of a tax “holiday” for corporate America.
The idea is to let companies deduct 85 percent of any cash they repatriate to the U.S. from overseas subsidiaries. The tax revenue from the move would help plug a funding deficit at the Highway Trust Fund, ensuring that critical infrastructure projects don’t fall by the wayside in the coming months.
|There’s movement afoot in Congress to bring corporate dollars that are parked overseas, back to the U.S.|
The fund faces depletion because gas and diesel tax revenue is falling due to the rising fuel efficiency of American cars and trucks. Estimates say Treasury could reap anywhere from $20 billion to $30 billion over the next couple years from such a holiday.
Some objections have already been raised to the idea of a “one off” holiday, like what the U.S. did in 2004. That brought more than $360 billion back into the U.S., but arguably did not boost hiring or investment as much as supporters were hoping.
A one-off holiday could also ultimately cost the government money — as much as $96 billion — in the longer-term period beyond two years. That’s the conclusion of the Joint Committee on Taxation, which assumed that corporations would have to eventually pay taxes at a higher, non-holiday rate anyway.
The Reid-Paul plan tries to get around that by eliminating the tax deductibility of borrowing specifically undertaken to dodge taxes on repatriating overseas cash. That would theoretically boost the “front end” take from a holiday, while largely eliminating the back-end costs.
“The U.S. corporate tax rate is 35 percent, the highest in the developed world.”
It’s an interesting approach, to say the least. While full-scale tax reform is obviously a better option — and one many in Congress would prefer — any step that encourages repatriation should be good for investors. It would discourage corporations from leveraging up their balance sheets any more than they already have. And it would increase the amount of money available for investment and shareholder-friendly returns of capital.
But that’s just my opinion. I’m eager to hear yours, too. Should we give corporations a break to bring their overseas dough home? And if so, what should we use the money for? Increased infrastructure spending or to fund broader tax reform?
Would you increase your stock exposure if you knew that companies were going to get a windfall of several hundred billion dollars? Let me know by sounding off in the comment section below.
|OUR READERS SPEAK|
Boy, did my latest piece on student loan relief touch a nerve. Many of you were fighting mad about the massive inflation in college costs, the perceived light workloads of college professors, and the lack of foresight by students and families when borrowing in the first place. Others were angry with the government for making college so expensive in the first place — but also had constructive suggestions for how to get out of this mess.
Reader Bill said: “Why not start by charging students the same interest rates that the Fed charges the banks (less than 1 percent)? Our daughter’s student loans from the government are 6.25 percent, higher than any of her private loans.”
Reader Jim chimed in by saying that “Shouldn’t cost the taxpayer anything as the principal is being repaid. Gov’t has sure fire way to get their money too — can’t bankrupt against the debt and they can garnish tax refunds. This type of instrument deserves a below market rate. String out the principal repayment too like a house — 30 years.”
But Reader Rich believes bankruptcy relief should be on the table for student borrowers. That would enforce lending discipline and allow for a fresh start — just like the bankruptcy code provides for credit card and other debt. His comments:
“Easy fix for the student loan problem. Allow student loans to be included in bankruptcy like any other creditor obligations. Many students would surely go bankrupt. If done correctly, a student would recover in about 3 years with zero debt.
“The Feds would now have to learn (the hard way) to not give loans out to anybody; especially kids who have little chance of paying the money back anyway with their ‘soft’ chosen majors. The cost of University would go down due to basic supply and demand.”
Reader Anne latched on to the rising borrowing/rising tuition problem as well, saying: “No reason for the government to be involved. That’s a relatively new development and it’s not working out well. Colleges used to make financial aid packages to outstanding students. If today they made the loans out of their endowment funds, they’d be a little more cautious about funding students who were unlikely to graduate. And with federal funding out of the picture, the colleges would lower tuition and other fees.”
Again, these are good points all around and I’m glad to see the lively debate.
Add your thoughts below if you’d like.
|OTHER DEVELOPMENTS OF THE DAY|
Republican House Majority Leader Eric Cantor of Virginia lost in a primary election to Tea Party candidate and economist Dave Brat. The shocking defeat could derail immigration reform, while increasing the political pressure on the Federal Reserve from the Right.
The world used to focus intently on meetings of the Organization of the Petroleum Exporting Countries (OPEC) because the group could cause big swings in crude prices. But pricing held relatively steady in the wake of the group’s decision to keep its production quota at 30 million barrels per day.
Topping the leaders list today was Ulta Salon Cosmetics & Fragrance (Weiss Ratings: ULTA, B), the makeup and accessories retailer. It surged 13.8 percent after topping earnings and sales targets in the first quarter. But Orexigen Therapeutics (Weiss Ratings: OREX, D) got clipped to the tune of 14.7 percent after the FDA delayed a review of the firm’s anti-obesity drug.
It’s so easy to bash the airlines these days, maybe I should stop. Naahhh!! United Airlines is now going the way of Delta, diluting the value of its frequent flier program by basing mileage awards on money spent versus miles flown.
So if you are a millionaire who pays top dollar to fly to exotic locales to enjoy champagne wishes and caviar dreams, you’ll now have the chance to get more free tickets. Because, you know, that’s exactly what you need! The average guy who scrounges his nickels together to fly? Enjoy your free peanuts … because that’s all you get! LOL.
You can let me know what you think by putting your comments at the bottom, allowing you and your fellow readers to learn from each other in this topsy-turvy market.
Until next time,