By Judd Gregg - 11/07/11 10:15 AM EST
It is now estimated that American companies hold trillions of dollars in cash or cash equivalents in foreign countries.
One would naturally assume they would like to bring this money home, as many of these companies are carrying large amounts of debt on their U.S. balance sheets. Their cash is overseas and their debt is here.
This strange fact occurs almost entirely because of our tax laws. If a company wants to bring back money it has made in China or India, it must pay a 35 percent U.S. tax on that repatriation. In addition, it is likely the country from which the funds are returned will also hit the company with a tax. In China, that would be 10 percent and in India it would be 17 percent.
The practical effect is twofold. First, companies with most of their cash overseas are given an incentive to invest that cash overseas. For example, XYZ company wishes to buy, expand or invest in the United States and needs to use some of its foreign cash to do it. To make sense, that investment must be able to justify a minimum of a 35 percent cost premium because that is the cost of bringing the money back. Thus, an investment in the United States that might cost $1 billion actually costs the firm $1.35 billion.
This explains one major reason why we are not seeing a great deal of investment and jobs created here. How stupid is it to penalize our domestic corporations with this sort of tax policy? We are essentially the only industrialized nation that has this approach to taxing foreign income of domestic companies.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) gets it. He has proposed a bill to change our universal system to a territorial system along the lines of our competitors with the safeguards to make sure that corporations could not game the system.
This proposal would be a tremendous step forward in our efforts to level the playing field in international tax policy and give American companies a reason to repatriate money made overseas.
Unfortunately, it will take time to pass his bill in this divided Congress, and we really do not have a great deal of time. We need this massive amount of cash back in the United States to be invested in creating jobs or at least paying dividends so pension funds and other stockholders can start putting the money to work here in America.
While we wait for a lightning bolt of common sense to strike the Capitol and cause some movement of Camp’s idea, we need intermediate action. It could be expedited by the supercommittee and would assist them in addressing the deficit and long-term debt.
The supercommittee should propose a tax holiday on repatriation. It would need to be conditioned so the funds returned are put to work in U.S. securities, purchasing U.S. assets, adding jobs or paying dividends.
We tried such a holiday a few years ago and it worked well. This time, it would be even more robustly embraced with even more dollars overseas and with the United States a much better place to invest than Europe.
The only thing that holds this back is the arcane scoring of the Congressional Budget Office, which assumes somehow that one day this money will return as a 35 percent tax event.
It is not going to happen. No corporation is going to do that. The money will stay overseas and be used to create jobs and economic activity there. Under no scenario can a 35 percent cost premium justify repatriation.
Instead of using this logic for scoring, CBO would be much wiser to consider what would happen in the real world. If companies were allowed to repatriate their overseas earnings at a reasonable cost, then one could assume billions, if not trillions, would come back.
If those dollars were paid out in dividends, they would be subject to a 15 percent tax. On $1 trillion, this would amount to $150 billion of unexpected revenue for the federal government.
There are many different ways to get this economy going again. Some are complicated, some politically challenging, some require a leap of confidence and one or two are “no brainers.” This is a no brainer. It is time to get this massive amount of funds back here where it can help us create jobs and get this nation’s economic engines fired up again.
Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations subcommittee on Foreign Operations. He also is an international adviser to Goldman Sachs.