$2 Trillion in Corporate Profits Perched Overseas

29 comments

Posted on 11th March 2013 by LLPOH in Economy

In a small effort to help assist during Admin’s sporadic posting week, I thought I would revisit the issue of US corporate taxes, and the resultant $2 trillion in profits that are sitting overseas, and which are unlikely to be brought into the US anytime soon due to the corporate tax rates in effect. Please forgive any typos as I am typing this directly into WordPress.

I just read today that Admin’s second most favorite company (sitting squarely behind IKEA in the number one spot), GE, has $108 billion in profits sitting overseas, which is being used to invest in overseas projects. Overall, there is believed to be around $2 trillion total in profits that foreign arms of US companies have made that are not being transferred to parent companies in the US owing to the corporate tax rate of 35%, which is, of course, the world’s highest. Those transfers will not be made, as it would be irrational for a company to do so.

Everyone knows that corporations pay little or no tax on their US profits, for a great many reasons – tax breaks, R+D credits, etc etc etc. Total corporate tax take is around $300 billion a year. However, any overseas profits brought back on shore would be hit with the full corporate tax rate, as the various rorts have already been used to minimize the tax on onshore profits. If the full $2 trillion were to be repatriated, it would mean an approximate tax bill of some $700 billion dollars. That is not going to happen, as the companies would rather be investing the $700 billion rather than just giving it away to the IRS. Further, if the money were repatriated, and the $1.3 trillion left after the tax take was invested in the US, the income on the money would be subject to the draconian 35% tax rate – as I have said, which is the highest in the world (at least the developed world). So the long and the short of it is, corporations are way ahead of the game if they do not bring the money home. Even very modest returns on their $2 trillion investment means the corporations are generating billions in income more than if they were to bring the money into the US.

A further issue is that transfer pricing is being rorted mightily. Companies are doing all possible to make sure their overseas arms post a profit, and for their US entities to not post a profit. The best way to do this is to ensure that the overseas entities sell goods to their US entities at inflated prices, thus maximizing overseas profits and minimizing US profits. And vice versa. There is huge incentive to do this, and it is being done on a very large scale, despite attempts to keep it from happening.

An interesting fact is that around $1.5 trillion of the overseas profits are actually held in US banks. The overseas entities send their profits to US banks to hold, and it is not deemed to be returned to the US. It is simply a foreign entity having accounts in the US. The main reason it is done is to protect the parent corporation from swings in the exchange rate of the US dollar. So rather than holding the profits in ringits or baht or whatever, the foreign arms open a US bank account and deposit the foreign earnings into JP Morgan, US treasuries, or whatever.

So, to summarize, the curent tax system 1) gives corporations incentive to leave foreign profits overseas, and not bring the profits back to the US, and 2) gives incentives to artificially minimize US profits by transferring the profits to the overseas arms of the US corporations so as to minimize US tax. It takes a particular kind of stupid to come up with a system that achieves exactly the opposite of what it should.

I understand that this can be a very complex issue, but the current system is promoting the flow of capital out of the US into countries that the US is competing against in a world-wide marketplace. It seems to me that the tax rate shuld reflect the global market, and a corporate tax rate of around 15 to 20% would eliminate the incentive which exists to 1) minimize US earnings in favor of foreign earnings, and 2) hold profits overseas. It would result in a significant increase in US capital expenditure, which would make the US more internationally competitive, and would create high-end, good paying jobs, and would make direct competitor nations less competetive at the same time, starving them of capital and profits.

It is beyond my ability to calculate the tax gain or loss this would create. There is currently around $300 billion in corporate taxes paid per year. A lower rate would certainly take from that pool but it would be at least somewhat offset by job creation and the resulting personal income tax take, some tax on repatriated profits, and some tax on profits not shifted overseas via transfer pricing.

It is the definition of insanity for a nation to have the highest tax rates in the world, which the US does. It will invariable starve the nation of capital, will give incentive to transfer profits and jobs overseas, and will lead to a continued economic crisis. The answer is not to keep increasing corporate and personal taxes, but rather there needs to be a system that provides incentive for corporations to remain onshore, and for individuals to put their capital at risk. Such a system does not exist today, and those determined to redistribute wealth are failing to understand that they are killing off the flow of capital. A socialist agenda will not return the US to prosperity. People and corporations need incentive to risk their wealth and their labor, and such incentives have largely disappeared.

29 Comments
  1. Kill Bill says:

    So, to summarize, the curent [forgiven] tax system 1) gives corporations incentive to leave foreign profits overseas, and not bring the profits back to the US, -LLPOH

    I am confused. Under the current tax system they arent paying taxes? Right?

    Like or Dislike: Thumb up 0 Thumb down 0

    11th March 2013 at 11:04 pm

  2. KaD says:

    This ‘poor big corporations and their outrageous taxes’ routine is so old: http://www.motherjones.com/mojo/2012/04/top-tax-dodging-companies-politicians

    10 Big Companies That Pay No Taxes

    Between 2008 and 2011, 26 major American corporations paid no net federal income taxes despite bringing in billions in profits, according to a new report (PDF) from the nonprofit research group Citizens for Tax Justice. CTJ calculates that if the companies had paid the full 35 percent corporate tax rate, they would have put more than $78 billion into government coffers.

    Here’s a look at the 10 most profitable tax evaders and the politicians their CEOs, employees, and PACs give the most money to.

    Verizon Communications
    Profits: $19.8 billion Effective tax rate: -3.8%

    General Electric
    Profits: $19.6 billion Effective tax rate: -18.9%

    Boeing
    Profits: $14.8 billion Effective tax rate: -5.5%

    NextEra Energy: North America’s largest solar and wind power operator, based in Florida
    Profits: $8.8 billion Effective tax rate: -2%

    American Electric Power: Electric utility based in Columbus, Ohio
    Profits: $8.2 billion Effective tax rate: -6.4%

    Pacific Gas & Electric: California electrical utility
    Profits: $6 billion Effective tax rate: -8.4%

    Apache: Houston-based oil and gas company
    Profits: $6 billion Effective tax rate: -0.3%

    Consolidated Edison: New York energy company
    Profits: $5.9 billion Effective tax rate: -1.3%

    El Paso: Houston-based energy company that operates the country’s largest natural gas pipeline
    Profits: $4.6 billion Effective tax rate: -0.9%

    CenterPoint Energy: Electric and gas utility company based in Houston
    Profits: $3.1 billion Effective tax rate: -11.3%

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 1

    11th March 2013 at 11:05 pm

  3. Llpoh says:

    KB – they pay little tax on their US operations for a lot of reasons – r and d credits, loopholes, etc. same would not apply if they bring back the profits. They would bring the profits home if it was not for the tax rate.

    KaD is posting financial statement profits as opposed to taxes paid. The two cannot be compared. R and D credits, etc etc etc come into play.

    Fact is the US has the highest corporate tax rate in the world and that tax rate is resulting in TRIlLiOnS of dollars in profits staying overseas, and untold profits being transferred overseas via transfer payments.

    Increasing the tax rate, or take, will only make the problem worse.

    Whether KaD or anyone else thinks they are not paying enough tax is of no consequence. The corps behave as they do because they can pay less tax elsewhere. And the US cannot afford not to compete on tax. Other countries are using that fact to kick the US”s ass.

    Like or Dislike: Thumb up 4 Thumb down 2

    11th March 2013 at 11:29 pm

  4. Kill Bill says:

    KB – they pay little tax on their US operations for a lot of reasons – r and d credits, loopholes, etc. same would not apply if they bring back the profits. They would bring the profits home if it was not for the tax rate. -LLPOH

    But if it was not taxed here, why put it there? Sorry, I just havent gotten my head around this, yet.

    Like or Dislike: Thumb up 0 Thumb down 0

    11th March 2013 at 11:48 pm

  5. Makati1 says:

    I hope they put ALL of it in USTs and when the crash comes, they can wipe their butts with them.

    Well-loved. Like or Dislike: Thumb up 8 Thumb down 0

    11th March 2013 at 12:38 am

  6. Llpoh says:

    KB – overseas profitsmade by subsidiaries of Us corporations fall under the tax laws of countries where the subsidiaries reside until such time as the profits are repatriated to the parent company in the US. At that time those profits become US taxable. . The subsidiaries tend to pay little or no taxes to the foreign nations where they reside owing to sweetheart deals, etc.

    Corps will not bring profits into the US if they can avoided it owing to the huge tax rates that apply. So trillions are left overseas.

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 0

    11th March 2013 at 1:31 am

  7. napari says:

    So if your the POTUS who promised the fundamental transformation of the USA everything is going according to plan. To have global wealth more fairly redistributed one cannot have laws that encourage wealth’s return to the USA.

    Like or Dislike: Thumb up 2 Thumb down 0

    11th March 2013 at 4:09 am

  8. card802 says:

    And not only is it an incentive to move profit out of the US, it’s an incentive to close manufacturing plants here, and open new ones offshore.

    Just imagine if corporate tax rates were zero. Corporations would bring manufacturing jobs back here, employ millions and those millions would get off the government tit.

    And the howl from washington? Raise taxes higher of course, you know, in the name of fairness.
    “Vote for me and I will set you free………”

    It truly is a very special kind of stupid.

    Hot debate. What do you think? Thumb up 6 Thumb down 3

    11th March 2013 at 7:03 am

  9. Llpoh says:

    Card – boy do I hear you and agree.

    Like or Dislike: Thumb up 3 Thumb down 2

    11th March 2013 at 8:05 am

  10. GJH says:

    Good stuff, llpoh, I always enjoy your articles.

    I find your view convincing, at least to a point. Good luck with libtards.

    Lots of people don’t like this message because of the incredibly skewed distribution of wealth and power that already exists, and imagine that lowering corporate taxes would worsen an already obscene situation.

    One might argue that such concentrated wealth is a key factor in our fuckedness. I.e. corporations and the super-rich perverting most areas of our lives with their inordinate economic and political power, and generally damaging our well-being and liberty.

    How would you respond? Do you consider the current distribution of wealth & power to be problematic?

    If so, what could be done about it without resorting to the usual socialist crap? Break up monopolies/oligopolies? Default on b.s. debt? Remove laws and regulations that favor giant corps at expense of small business? A return to hard money vs fiat? Consumers en masse pull their heads out of their asses some fine day? Somehow ‘get the $ out of politics’?

    rort? rort – verb: to take unfair advantage of a public service ((Cambridge Dictionary Online
    I’m going back to bed. I’ve already learned something new today.

    Like or Dislike: Thumb up 2 Thumb down 0

    11th March 2013 at 9:04 am

  11. GJH says:

    I guess one could respond that if we lower taxes rates and corps bring back capital and open plants in the US, they may end up paying and making the same they did before, except now they’d be investing & creating jobs in the US instead of abroad. So the benefits could be huge, leading to a revitalization of the country, as some would argue, while it wouldn’t make much difference in the distribution of wealth/power, or might even improve it by putting some badly needed capital back into the working & middle classes.

    Still, I’m interested in your view on the issue of extremely concentrated wealth and power in the hands of corps and the top 0.1%, and how it relates to taxation, given that’s the usual liberal proposal of how to deal with it.

    Like or Dislike: Thumb up 1 Thumb down 0

    11th March 2013 at 9:20 am

  12. Eyeful says:

    So waitaminute, I thought corporations in America = real, living, breathing people, like me.
    I’m real, living, breathing people.
    And I have to pay taxes on any income I make anywhere in the world, even if I’m at the bottom of the Pacific trench.
    So why can GE, which is real, living, breathing people, like me, park its money overseas and pay no taxes on it?
    I know I’m stupid and a sheeple, but 1+1 isn’t adding up. It would seem that if we’re all equal before the law, then Mr. G. Electric should be paying his fair share, too.

    BTW-did anyone hear about the guy who was pulled over for driving in his car alone in the HOV lane with corporate documents in the passenger seat? He told the police since corporations in America = people, he was, in fact, car pooling. http://www.chron.com/communityblogs/atmosphere/article/HOV-dispute-could-poses-bigger-questions-4172615.php

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    11th March 2013 at 9:44 am

  13. GreasedUpWillie says:

    eyeful, you don’t have millions to buy politicians, that is why you do not get the same loopholes. In the fifties, corporate income tax was 6% of GDP, it is now 1%. Spending has gone from 22% to 38% of GDP, so no free passes on that side of the ledger. But start breaking down that spending: defense (military industrial complex), Medicare/Medicaid (Health care, big pharma), Ag subsidies (big ag), etc., and you will find most of this spending ends up directly in the corporate coffers. To rail against either government or corporations is wrong, they are one in the same.

    Like or Dislike: Thumb up 3 Thumb down 0

    11th March 2013 at 11:42 am

  14. Dorkus Maximus says:

    Who could have predicted that after an election in which the president ran on an “eat the rich” platform followed up by two phoney-baloney budget crises loaded with Robin Hood rhetoric that our overlords would their money offshore? Baffling. Certainly no cause and effect there at all.

    Like or Dislike: Thumb up 3 Thumb down 0

    11th March 2013 at 12:15 pm

  15. Dorkus Maximus says:

    Bitching about corporate tax rates is silly in comparison to the big fish: capital gains taxes.

    This is where the money’s at. This is where Warren Buffet and his ilk make and sustain their billions. This is the issue you will NEVER hear Buffet pontificate about. He likes this rate nice and low.

    Chasing the corporate rate is like don quixote fighting windmills – you’ll never win.

    Exempt the first 10K of capital gains and tax the rest as ordinary income and its problem solved. It’ll never happen because it makes too much sense.

    Like or Dislike: Thumb up 4 Thumb down 0

    11th March 2013 at 12:21 pm

  16. Llpoh says:

    I think corp tax rate should be zero, dividends should be taxed at full marginal rates, and capital gains taxed a little bit preferentially but not as low as currently, say perhaps around thirty percent.

    Like or Dislike: Thumb up 3 Thumb down 0

    11th March 2013 at 3:45 pm

  17. Llpoh says:

    Just think how many lobbyists, accountants, and lawyers would be out of work if the corp tax rate went to zero.

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    11th March 2013 at 3:47 pm

  18. Administrator says:

    LLPOH for President.

    I think capital gains on small business owners like yourself should be low. These type of capital gains are related to true investments in assets that create jobs in America.

    Capital gains on passive investments in public companies should be taxed at full marginal rates.

    Well-loved. Like or Dislike: Thumb up 5 Thumb down 0

    11th March 2013 at 3:58 pm

  19. Dorkus Maximus says:

    Llpoh:

    I sometimes think that dividends should be taxed at a lower rate that cap gains or ordinary income to encourage payouts to shareholders rather than leaving big piles of money around for the insiders to loot or for bribing politicians. I’m not sure I understand the consequences of this approach, however.

    I heartily agree that cap gains on passive investments should be at full marginal rates. It would cost nothing and might even save the country.

    Like or Dislike: Thumb up 0 Thumb down 1

    11th March 2013 at 4:16 pm

  20. llpoh says:

    Admin – nice comments on capital gains.

    Dorkus – stopping paid lobbyists would be a good step. If corp tax were zero, a lot of reasons for lobbying would disappear. Cash left in business is generallly invested – eventually. Investment drives jobs. There will be a lot less incentive to take jobs/work overseas if the corp tax rate is zero.

    I only agree that dividends should be taxed at the highest marginal rates if corp taxes are zero – otherwise it is double taxation on the owners of business.

    GJH – I do not have answers to some of yourpoints. I am opposed to corporations wielding political power (and unions, etc.). Paid lobbyists need to be eliminated, and donations should be limited to individuals and capped at relatively modest rates. I suspect neither of these changes will happen.

    Re distribution of wealth – I do not see that as a majo issue so long as there is a level playing field. I am not opposed at all to people making a lot of money and being able to keep it, so long as it is done legally and ethically. If there are groups that are unable to make a lot of money given a level field, that is unfortunate for them, but I see no reason why those that are producing, hard-working, risk-taking, possing of foresight and education, etc., should be forced to subsidize those that are not. Any transfers/distributions should be aimed at ensuring people have access to education, not just the wealthy. I believe that is one area where transfers are necessary. I do not mean just throw money at education, but rather there needs to be a real opportunity for those less economically advantage to obtain an education if they so desire.

    Like or Dislike: Thumb up 0 Thumb down 0

    11th March 2013 at 6:33 pm

  21. Stucky says:

    llpoh

    Zara said you are letting me blow you. The “love” thread. Are you going to take that shit?

    Like or Dislike: Thumb up 2 Thumb down 0

    11th March 2013 at 6:41 pm

  22. Llpoh says:

    Stucky – Z is a hate filled dick. My job is to keep pointing that out, but I am otherwise trying not to engage with him. He is a smegma stain on the shorts of all good and honest TBPers. ( a thrush stain on the panties of female TBPers, lest people think all TBPers are male).

    Like or Dislike: Thumb up 2 Thumb down 4

    11th March 2013 at 7:21 pm

  23. Zarathustra says:

    Llpoh, it’s good to have a second job, although I don’t see how much time you can give it in addition to your main job of finding people who will kiss your ass.

    Like or Dislike: Thumb up 4 Thumb down 2

    11th March 2013 at 7:29 pm

  24. Llpoh says:

    Z – don’t you have a commune to join somewhere. Seems all your patents and life choices have left you without the necessaries to actually go out and buy your own escape hatch. You have to go impose your hate filled ways on some poor, unsuspecting hippies. Damn, I wouldn’t want to be them.

    Ass kissers do not make me money. I am all about the chavos. That is why I am in business. If they make me money, and do not steal from me, and do not take safety risks, and leave other employees alone, I could not give a fuck about anything else. If they make me money, the can kiss my ass or curse it at every turn. Their business. Mine is to put chavos in my pocket. As a by-product, I keep a lot of folks employed on reasonable wages, and generate a lot of revenue for the govt.

    Asskissers? What a maroon. If I needed stroking, I would get a Ferrari. Instead I drive a Jeep. But I have abandoned almost all trappings of wealth. They do nothing for me. A nice house, a few acres, a serviceable car, and good booze suits me fine. The rest is bullshit.

    Like or Dislike: Thumb up 2 Thumb down 1

    11th March 2013 at 7:47 pm

  25. BiggTmofo says:

    Just popping in but taxes make my head hurt and heart rate go up. Ok it’s not fair that GE can have overseas profits while Eyeful and others like us have to pay tax on all income. Again lobbyist get paid to make it happen or else they are replaced by someone who will make it happen. My small brain thinks if a repatriation deal is struck it will mostly go into stock buybacks to increase EPS. However with the market highs it may not be the best time for that right now. However GE looks to be a very good prospect for buybacks if such a deal happens but I am not betting on it. Back to the topic at hand though is that a LLC or 1120 is THE BEST TAX SHELTER THERE OUT THERE.

    The second point that the poster made above is that on a local small business the tax is the cost of doing business and works if the cost can be passed on to the customer. If the cost can’t be passed on then cutbacks in hours, employees and the like will happen. I also have to do more research on this topic but I think for example that English people(Legal and Biological) don’t pay taxes on overseas earnings. So when Stones tour here they pay the IRS but the Chancellor of the Exchequer and Elton the same deal. Hey what a great idea tax only where you made the money.

    Like or Dislike: Thumb up 1 Thumb down 0

    11th March 2013 at 8:00 pm

  26. Llpoh says:

    Internationally, corps are taxed in the country where the profits are made, until the money is repatriated to the parent.

    Re individuals, taxes are paid to the country where the money is made.

    With only one exception. The US is the ONLY country in the world that taxes it ps citizens on money they make overseas. (Eritrea does to, but for fuck sake let’s ignore that anomaly). The US taxes its citizens on world-wide income.

    The tax reporting burden it places on its six million overseas citizens is incredible. Those six million must file two sets of returns. They must convert the currency into US dollars for the US return. There is a huge range of misc reports they must fill out that US residents do not. The penalties for getting the info wrong or for not knowing they have to file the reports is draconian – both civil and criminal.

    I believe it is almost impossible for a US citizen living overseas to not commit major tax crime eventually owing to the complexity of the filing requirements. Anyone moving overseas needs to keep that in mind. The cost of filing taxes from overseas will be very onerous indeed.

    Like or Dislike: Thumb up 4 Thumb down 0

    11th March 2013 at 8:14 pm

  27. TeresaE says:

    LLPOH, nice.

    Only one note today, mainly because out of all the fixes we need to right this ship, thinking the tax/corporate situation is going to be “fixed” without firing ALL of Washington, is pretty optimistic

    But, you just mentioned the US tax situation. This is relatively new – we used to honor other countries tax provisions and Americans were only supposed to be liable for any net “savings” if the working country tax rate is lower than ours.

    What is striking is how few people SEE what this means to us going forward.

    Once a country initiates dominion over finances to the level that this law does, it isn’t long before they initiate outright confiscation.

    First regulate and strangle the compliant.
    Then use the failure of compliance to let down your facade and take it all.

    Pretty silently, over the past decade or so, the feds have been busy pushing through laws that criminalize business administration mistakes and put in place the means to take over everything from farming (including your own garden), to medicine, to guns, to food, to manufacturing, to private retirement savings. The over-regulation helps to destroy the industry, which then leads to more problems, which will then lead to outright nationalization, banning, or confiscation.

    Over and over and over, we have seen this pattern.

    Why wouldn’t our very sweat and effort be the same?

    This is financial repression at Draconian levels. Just like the plans for 100% inheritance taxes.

    Those Americans that moved don’t deserve the fruits of their labors because they moved and “America” needs it.

    Your kids and spouse don’t deserve the fruits of your labor, America needs it.

    Getting pretty easy to see why the numbers of those not contributing are skyrocketing compared to the numbers of those paying.

    Why bother working, growing, gaining skills, winning new business, saving, when the gov will just arbitrarily take it away from you – or take your freedom – and you could be sitting on your ass more with only minimum disruption to your lifestyle?

    The day of running out of other peoples’ monies seemingly grows ever closer.

    Ponzi on.

    Like or Dislike: Thumb up 3 Thumb down 0

    11th March 2013 at 12:56 pm

  28. llpoh says:

    Very nice comments, Teresa. As always.

    Here s an excerpt from an article. Basically, it indicates that the trend to perch money overseas is accelerationg. It also, in my reading, supports my position that transfer pricing is being used to increase the profits of the foreign subsidiaries while reducing US profits, and thus US tax (microsoft says 93% of its profits are made overseas!! That seems to me to only be possible if transfer pricing is being used to shift profits overseas).

    “Software maker Microsoft Corp. boosted the holdings of its foreign subsidiaries by $16 billion in the fiscal year ended June 30, 2012, to $60.8 billion, the third-largest holding in the Journal survey. The growth in Microsoft’s overseas holdings nearly equaled its net income for the year of $17 billion — in part because Microsoft said its foreign operations accounted for 93% of its pretax profit last year.”

    US tax policy is killing the golden goose. What profits are declared in the US are not being taxed due to loopholes and lobbyists. The corps have enormous incentive to send/keep profits overseas. The whole tax structure is screwed up – there is something like 17,000 pages of tax law in place. The US is not competetive on corp or personal tax, and every decision they take to try to stem the sterady flow of tax receipts moving overseas simply increases the flow.

    They basically try to increase the tax rate to recover the tax loss, failing to understand it is the high tax rate that is driving capital and profit oversess where it is outside the reach of the US tax man. There is no understanding that the US must compete on tax rates. And the US is getting slaughtered in this competition. And there is no indication that the game plan is going to change.

    Like or Dislike: Thumb up 0 Thumb down 0

    11th March 2013 at 6:58 pm

  29. David Paul: Beware the Global Consequences of Further Declines in the American Middle Class | Political Ration says:

    [...] rate — corporate America is now holding out for a second bite at the apple, with as much as $2 trillion held hostage in offshore accounts. Cisco Systems CEO John Chambers, whose company’s offshore [...]

    Like or Dislike: Thumb up 0 Thumb down 0

    11th March 2013 at 6:34 pm

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