History has shown multinationals have not created jobs when granted tax relief on overseas profits
Cisco CEO John Chambers and Oracle President Safra Catz co-authored an op-ed piece in the Wall Street Journal last week claiming that profits held by multinational corporations overseas could inject $1 trillion into the US economy if the US tax policy is changed. The US taxes overseas profits at 35% while companies headquartered in other developed countries can repatriate their foreign earnings at 0% to 2%, the business leaders claim.
Chambers and Catz say even if the repatriated earnings were taxed at 5% it would create a privately-funded economic stimulus for the US of up to a trillion dollars and $50 billion in tax revenue for the government – larger than the entire federal stimulus package. Companies would spend the money on expanding operations, which would lead to more job creation, R&D investment, building more facilities and buying more equipment.
Up to two million Americans could be put back to work at no cost to the government or taxpayer if the US would just lower the tax on overseas profits to 5%, Chambers and Catz claim.
Really?
The New York Times noted in an op-ed piece last Sunday that this has been argued before, and granted, but no such economic stimulus occurred. Back in 2005, Congress passed the Homeland Investment Act which allowed multinationals to repatriate $300 billion in overseas profits at a tax rate of 5.25% in exchange for the promise of building more factories and creating more jobs.
It never happened. Here’s what did, according to the Times:
Research by three prominent economists, including Kristin Forbes, a former top economic adviser to President George W. Bush, found that between 60 and 92 cents of every dollar brought home found its way into shareholders’ pockets.
The law required that companies use the repatriated money for productive purposes like research and hiring. That did not matter. Money being fungible, firms could easily claim they were not using “those” dollars on stock buybacks and executive pay.
Cisco, which has $30 billion in cash stashed overseas, has been beating the “repeal the repatriation tax” drum for years. Part of its argument is that it will not be able to acquire US companies with cash generated from overseas profits due to the onerous tax implications. But we have seen the opposite: Bloomberg BusinessWeek reported that, of the 87 companies Cisco’s acquired in the past 10 years – at a cost of $22.2 billion – only 11 were outside the U.S. And this year alone, Cisco’s acquired four companies, all in the US.
Meanwhile, Cisco’s also been investing in operations and personnel overseas, like Bangalore and Russia. So despite the repatriation tax structure — 5% or 35% — we expect Cisco to maintain the status quo. Shareholders like those 65% profit margins more than pledges to reinvest back into US economy if granted some tax relief.
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