Tax laws and standard accounting practices have caused a lot of corporate profits from US companies to accumulate outside the US. There is a current lobbying and legislative effort underway to temporarily cut the tax rate on bringing those profits back to the US.
To understand the offshore buildup the New York Times has put together this very handy video.
See, everything is legal. If you were a corporation why would you want to pay a 35% tax on your profits when you could be paying only 5.25%. This is why big pharmaceutical, technology and energy companies are lining up to support a one year repatriation holiday. They want to bring the money home for lots of good reasons, though the lobbying effort mainly talks about job creation. If they can bring the money home then they can use it to hire more workers to do research and development on the next big thing. This sounds like a good thing and there is a lot of money waiting to come home. According to the New York Times:
Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion.
The only problem is the last time this was done in 2004 a large chunk of the repatriated profits went to shareholders in the form of dividends and stock buybacks that inflate share prices. It’s not that these are inherently bad goals, but if that’s what the money is going to be spent on then they should talk less about jobs and more about dividends and buybacks. In 2004 there were numbers floated around of the possibility of creating 500,000 new jobs, but after the deed was done studies found no net increase in jobs from the repatriated profits.
If corporate tax rates on repatriated profits stay at a rate that companies see as so high they are willing to keep the money offshore and Congress introduces a tax holiday every 5-10 years then the cycle will just continue this way. Expect to hear talk of a profit repatriation tax holiday again in 2016, 2021, 2026 … We’re not solving problems, we’re just repeating history.
Sources: The Register, NYT, Image
