As we stare into the economic double dip abyss, there are still some low hanging fruit to be picked by policy makers to aid the economy and business. With changes to the tax laws focused on increasing receipts to pay for spending, tax cuts seem to be out of favor. However, I think it would be a great time to discuss a cut in foreign tax earnings for US companies.
Under current law, US companies are subject to US tax on foreign earnings when distributed to the US unit as a dividend. Given lower tax rates in some countries abroad, this provision discourages companies from bringing these earnings back to the United States and keeps the funds offshore.
The last time we did this back in 2004-2005, it was called the Homeland Investment Act or American Job Creation Act of 2004 (AJCA) and was signed into law on October 22nd, 2004. The premise was to cut the corporate tax rate from 35% down to 5.25% to encourage companies that have earnings sitting overseas to bring them back to the United States for investment. The tax break was for only one year and was intended to boost capital repatriation that was to be directed into domestic investment and capital expenditures.
At the time and out of reach by the IRS, it was estimated that over $500 billion was held offshore by America's top 500 firms in foreign accounts and other assets. The Joint Committee on Taxation estimated that revenue to the US Treasury would increase by $2.8 billion. After the bill was signed into law, big pharmaceutical companies like Eli Lilly ($8 billion), Bristol-Myers Squibb ($9 billion) and Schering Plough ($9.4 billion) said they would bring back funds.
The problem with this bill was that it was almost impossible to track the money once it had been brought back to the United States. One of the major concerns was that companies would use the funds to fund acquisitions and cut jobs. This would have to be addressed in new legislation. In 2009, there was a movement to bring back AJCA, but it was defeated for exactly these reasons.
What was the outcome of the 2004 AJCA? It wasn't perfect. In 2005, $312 billion in qualified dividends occurred and over 800 companies took advantage of the tax break. The biggest winner was the US Treasury which saw tax receipts soar by $18 billion. For a Congress that's thirsting for "Pay Fors", this would seem to be a layup.
According to a study by Grant Thorton, there was little evidence to suggest that the tax break increased domestic investment by those firms. Therefore, the "job creation" aspect seems a bit of a stretch. Yet, $300 billion came back to the country and was used to aid US companies. Whether it was a direct link to investment or jobs, it really doesn't matter. It had to have helped and didn't cost the US taxpayer or increase the deficit.
For these reasons, Congress needs to grab this tax apple and take a big bite.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.