As part of its radical but still mostly undefined tax plan, the Trump administration proposed a tax holiday for corporate earnings stored overseas. Reporters have been hearing on background that the tax rate would be slashed from 35 percent to 10 percent.
But judging from the last time it was tried, most of the cash Donald Trump would allow megacorporations to bring home from overseas at a bargain-basement tax rate would end up being used by corporate executives to inflate the prices of their stocks, thereby enriching themselves and their biggest investors — and doing little to employ Americans and grow the real economy.
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From 2004 to 2005, the Bush administration and Congress tried a one-time tax repatriation holiday, cutting the rate to 5.25 percent.
A Senate study in 2011 found that corporations brought $312 billion they had stashed overseas back to the United States, avoiding $3.3 billion in taxes as a result of the repatriation rate. But the top 15 companies that took advantage of the holiday actually reduced their total U.S. employment by 20,931 jobs.
Meanwhile, the report surveyed studies of all 840 corporations that took advantage of repatriation and concluded that there was “no evidence that repatriated funds increased overall U.S. employment.”
So what did the companies use the money for? The report found that two things increased dramatically after repatriation: executive compensation and stock buybacks.
The top five executives at the top 15 repatriating corporations saw their annual compensation increase by 27 percent from 2004 to 2005. Meanwhile, the top 15 repatriating corporations increased their spending on stock buybacks 16 percent from 2004 to 2005 and 38 percent from 2005 to 2006.
William Lazonick, an economist at the University of Massachusetts Lowell, has long studied the issue of stock buybacks. He noted in a Brookings paper published in 2015 that corporations have essentially established a “buyback economy“: Between 2004 and 2013, 454 companies in the S&P 500 Index did $3.4 trillion in stock buybacks, “representing 51 percent of net income. These companies expended an additional 35 percent of net income on dividends.”
“Why are you giving these companies any tax breaks when the vast majority of the profits are just being used to boost stock prices?” he asked in an interview with The Intercept.
Corporations are hardly concealing the fact that they’d like to repeat the 2004 tax repatriation experiment.
In January, The Intercept reviewed dozens of earnings calls and investor briefings and found many executives suggesting they’d use another repatriation holiday to increase stock buybacks and acquire other companies.
For instance, Cisco Systems Chief Financial Officer Kelly Kramer told a securities analyst, “We would have a blend of actions we can certainly take with our dividend as well as our share buyback, as well as leading flexibility for us to be able to do [mergers and acquisitions] and strategic investments.”
We need Llpoh to weigh in on how stupid this article is. Businesses don’t make investments in order to help people. They invest when they need to and when it makes sense. If they buy back their stock that money goes to the sellers of the stock and is invested somewhere or spent. It’s true that a one-time tax holiday is worse than maintaining a low corporate rate. Trump’s proposal is for an ongoing low corporate rate. Bush’s wasn’t. Even Obama in his 2011 SOTU speech acknowledged the need to cut the corporate rate, but then he didn’t do it, because he’s stupid and he hates business.
The money goes to reducing the number of shares. It artificially increases EPS – which is how executives earn their bennies. It does not go into the economy in any way. If these corporations used the money for a one time dividend or increased their annual dividend, the money would make it into the hands of people who could spend it.
The promise of the repatriation is to boost the economy. It’s been done before and hasn’t boosted the economy.
Lowering the rate permanently would be beneficial in the long run to keeping corporations in this country, but don’t believe the hype about this one-time repatriation.
Worse than that, Iska. Let’s review. The conservative estimate of money that might be brought back is 3 trillion dollars. 10% of that is 300 billion dollars in tax revenue, or about a 10% boost in tax income. Not chump change. Let’s say all that money goes into stock buybacks. That’s 3 QE’s. Bull market keeps a runnin, eh? And if you drop the business rate to 15%, corporate profits will continue to come home. Liberalism has infected everything.
Hmm. Interesting chart.
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So you don’t do it, Jim? What do you do? In my book, some benefit is always better than zero benefit. And you know I’m not a fan of the multi-nationals.
Don’t put words in my mouth. OK.
I didn’t say not to do it.
I said don’t sell it as some sort of boost to the economy. It will not boost the economy. It will boost the government coffers and it will boost the bank accounts of corporate executives. I’m sure the government will spend the $300 billion wisely and for good purpose. Right?
It will allow Trump to say he reduced the deficit in the year it flows in. Trump needs to cut something substantial from government spending before he gets any accolades from me.
Based on my personal tax situation, I expect his awesome plan to be at best neutral for me. All the fucking taxes I pay to Phila and PA will now be non-deductible while my tax rate will still be between 10% and 20% where it has always been. Why should I be cheering?
I didn’t ask that question flippantly. Like I have said here many times, breaking up some of the multi-nationals with anti-trust would be fine with me. I’m just asking to see if there are better alternatives, or do we take what we can get. I don’t care how he sells it, if it’s what’s best, and he can pull it off, do it. I’m pretty sure it’s also tied to financing both the infrastructure stuff and the industrial buildup stuff he wants to do. Haven’t heard him link them in a while, but he’s talked about it in the past, using real existing money instead of printing more.
For some perspective. The $300 billion will cover 30 days of Federal Government spending.
People act as if infrastructure spending hasn’t been happening. I’ve worked in Philly for 10 years. The 15 mile stretch from the Lansdale exit on the Northeast Ext to the Schuylkill Expressway has been under some form of major construction for the entire 10 years. And it hasn’t helped one bit.
A guy that works for me heard an interview with the dyke in charge of traffic in Broward, she said they aren’t going to waste any money timing lights or anything like that, they were going to encourage people to find other ways to get around besides cars. We keep rejecting sales tax increases for transit projects, so they punish us by fucking up the roads. I’ve searched for that interview with no luck. I’m hoping a lot of the abuses of local government were aided and abbetted by clinton/bush/obongo and will be brought to heel. We’ll see.
I think some of you including the Administrator are missing the point. You are lowering the Tax from 35 to 15% in order to domicile taxes in the US jurisdiction.
However, you still have trillions overseas that are stuck unless repatriated. So the 2 go hand in hand.
The money overseas is overseas. They won’t repatriate it until our nation is more attractive than the location it is currently held. Unless we want to mirror the banking practices of those nations, that will never happen.
Cut your losses, and move on. That money is no longer a part of the US economy.
I think you all may be missing the point. Save the leads in your pencils. This article, right or wrong, is what the dems will use to blow this turkey out of the sky.
DOA
What Happened The Last Time Companies Got A Tax-Break On Overseas Cash?
by Tyler Durden
Apr 27, 2017 7:25 PM
Yesterday’s underwhelming unveiling of President Trump’s Tax plan included a “one-time tax on trillions of dollars held overseas” presumably aimed at encouraging firms to onshore trilions of dollars of cash on the cheap – implicitly creating jobs and making America Great Again.
However, as The Congressional Research Service’s detailed study of the last time this was enacted in 2004 shows, the program had little effect. The program was part of the American Jobs Creation Act.
The hope then, as now, was that companies would shovel that money back into the economy in the form of investment and job creation. As CNBC’s Jeff Cox notes, it didn’t quite work out that way.
Contrary to the intent, the benefits skewed toward a select few companies in a select few industries. Rather than use the money for hiring and capital purchases, companies plowed the cash into share buybacks and dividends, and many of the biggest beneficiaries actually cut American jobs in the years after the repatriation.
“While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment,” the Congressional Research Service, Congress’ nonpartisan think tank, said in a report.
The CRS cited a series of reports into the benefits of repatriation, with a common theme that the 2004 program was “an ineffective means of increasing economic growth.”
In the 2004 case, 9,700 companies were eligible to take part in a tax holiday that would bring the overseas cash back at a rate of 5.25 percent, well below the 35 percent rate for profits earned abroad. Of that group, 843 firms participated. They brought home $312 billion in qualified earnings, or about one-third of the total cash held overseas, according to the CRS. That translated into total deductions of $265 billion.
Most of the money went to repairing balance sheets and rewarding shareholders, according to the CRS. According to one study cited, as much as 91 cents on the dollar went to share repurchases, even though that, along with compensation increases, was an expressly prohibited use by Congress.
Prohibited uses for the cash weren’t easy to track as the money ended up being commingled with other corporate funds. The CRS study said one of the biggest faults was that the permitted uses were “overly generous” and not “explicitly linked to specific uses.”
And in fact some firms laid off staff…
In the 2005-06 time frame, Pfizer, which repatriated $37 billion, slashed 10,000 jobs.
Merck, which brought back $15.9 billion, cut 7,000 jobs, and
HP pared its employment rolls by 14,500 after repatriating $14.5 billion.
But then again, is the point of this repatriation to improve economic growth at all? As we detailed previously, Goldman is convinced that most of the repatriated foreign cash will be used to fund buybacks thanks to historical precedent.
We estimate that $150 billion out of $780 billion of S&P 500 buybacks in 2017 will be driven by repatriated overseas cash. Corporate tax reform will likely be a top priority for the Trump Administration. Our economists expect that tax legislation in 2017 will include a one-time tax on previously untaxed foreign profits. We forecast that S&P 500 companies will repatriate close to $200 billion of their $1 trillion of total overseas cash in 2017, which will be directed primarily towards share repurchases.
Under current policy, US-based firms may defer US taxes on profits earned by foreign subsidiaries until they are repatriated. Once repatriated, foreign earnings are taxed at the US federal tax rate of 35% minus a credit for foreign taxes paid. Rates in other OECD countries range from a low of 12.5% in Ireland to a high of 34% in France. The deferral of tax on foreign profits combined with the high US statutory tax rate incentivize firms to shift as much income as possible to low-tax jurisdictions and to avoid repatriating income generated in those countries to the US.
President-elect Trump and House Republicans have both expressed support for a one-time tax on untaxed foreign profits. In their “blueprint” of potential tax reform, House Republicans proposed an 8.75% tax on permanently reinvested overseas cash and a 3.5% tax on other untaxed foreign earnings. Mr. Trump also proposed similar tax reform during his Presidential election campaign.
Our Washington, D.C. economist Alec Phillips expects that tax legislation will likely pass in 2H 2017. The probability of significant legislative activity has increased as a result of single-party control for the first time since 2010, and Republican singleparty control since 2006. In addition, tax reform appears to be prominent on the policy agenda in 2017. We expect to see initial tax reform proposals around March or April and possible enactment during the second-half of the year.
The reason Goldman expect S&P 500 firms to repatriate $200 billion of their $1 trillion total overseas cash in 2017, is because it complies with historical precedent: US firms repatriated 10% and 20% of their total estimated overseas cash during the 3-month and 6-month periods, respectively, following the enactment of the Homeland Investment Act (HIA) of 2004. Given the firms’ forecast of tax legislation during 2H 2017, Goldman predict that S&P 500 firms will repatriate 20% of total overseas cash next year.
And, furthermore, since buybacks were the biggest beneficiary of the repatriation tax holiday in 2004, Goldman expects more of the same this time:
We forecast $150 billion of the total $200 billion of repatriated overseas cash will be allocated to share repurchases in 2017. Share buybacks were the biggest beneficiary of the repatriation tax holiday in 2004. One study estimated that between $0.60 and $0.92 of every $1 repatriated was spent on share purchases (“Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act” (2011), The Journal of Finance 66(3): 753-787). S&P 500 buyback executions rose by 84% in 2004 and 58% in 2005. There was also a jump in dividends in 2004 and sharp M&A growth in 2005, but the rise in buybacks following the tax holiday far exceeded any other increase in cash use
There is one big risk however, to Goldman’s estimate, as the bank itself admits: “Increased debt levels, policy uncertainty, and stricter enforcement of rules regulating the use of repatriated cash pose risks to our estimate.” Given that S&P 500 net debt/EBITDA is close to all-time highs, firms may choose to allocate a portion of repatriated cash towards debt reduction.
Just like comparisons of the Trump and Reagan ignore that debt/GDP under Reagan was 30% (compared to nearly 100% now), S&P 500 leverage was also significantly below average around the time of the 2004 tax holiday.
To be sure, the HIA of 2004 prohibited firms from using repatriated cash on buybacks in an effort to increase domestic investment but, as Goldman notes, “money is fungible.” Still, if a tax reform package passes in 2017 with a similar goal of boosting domestic investment but has stricter regulation of cash use, then capital spending may experience significant increases rather than buybacks.
Incidentally, over the past week, the market has shown little worry that Trump may limit what the repatriated funds will be used for, and has already priced in much of the expected repatriation-funded buyback bonanza, as the following portfolio baskets show.
In short, absent a formal directive from the Trump administration on explicit “use of repatriation proceeds”, which curbs or outright limits the $200 billion or so in estimated repatriated proceeds, from being spent on buybacks (according to Goldman roughly 75% of the total amount will be used to pay shareholders) there will be virtually no benefit to the broader economy, and instead corporate shareholders will once again reap the benefits as they have for the past 7 years, a time in which they levered up their companies to all-time highs, with the vast majority of the newly raised debt used to fund, drumroll, buybacks.
* * *
So, to summarize – a yuuge overseas cash repatriation ‘deal’ is “an ineffective means of increasing economic growth,” but will benefit a select few companies in a select few industries who can further lever up their balance sheets, buy back more shares, and transfer wealth to their already wealthy shareholders (and we know how well that has worked out for Main Street in the last 8 years).