Skip to main content

Repatriating overseas profits -- panacea or problem?

I typically don't dwell too much on the Opinion section of the Wall Street Journal. Since Karl Rove became a frequent contributor, this is a page that I generally can't bypass quickly enough.

In Wednesday's paper, however, in the dreaded Karl Rove spot on the page, was a piece by John Chambers and Safra Catz. As a follower of tech stocks, I immediately recognized the names of, respectively, the chairman and CEO of Cisco Systems and the president of Oracle. These are business people with serious credibility who are not usually associated with any extreme political positions. I stopped to read further.

Their article, "The Overseas Profits Elephant in the Room" revisits some territory that has been covered by a number of bloggers recently. Basically, they contend that U.S. companies have a trillion dollars stashed overseas in their foreign operations but U.S. tax policy makes it prohibitively expensive to bring that money back to the U.S. where it could be used productively and, in the process, give the overall economy a boost.

The Problem Statement --

Here are some of the points the authors make when describing the negative aspects of the situation:

The penalty: for U.S. companies, repatriated foreign profits are subject to a 35% tax.  Other countries tax rates are more on the order of 0% to 2%. American companies, therefore, are unfairly penalized for being successful in their overseas operations.

U.S. companies are not at fault: the authors of the article refute commentators who say that companies have billions of dollars on their balance sheets but, because the companies won't spend the money the economy remains stalled. The authors contend the cash is indeed on the books but is out of reach due to the prohibitive tax rate.

Interest rates are low: with interest rates on corporate bonds so low, it is much more sensible for U.S. multi-nationals to borrow at 4% rather than repatriate profits and pay 35% in taxes.

The Solution??

Reduce the tax rate: the authors suggest that the tax rate be reduced to maybe 5%. This allows the government to collect a bit of revenue while allowing companies to bring back their overseas profits to use here in the U.S.

Put the cash to good use: the authors contend that the money could be used for "creating jobs, investing in research, building plants, purchasing equipment and other uses." The money could also be used for mergers and acquisitions, paying dividends or doing stock buy-backs: all good things for markets and investors.

Put the tax revenues to good use: the government could take the 5%, which would amount to roughly $50 billion, and use it to reward employers who hire new graduates or anyone who was formerly unemployed. The authors say more than 2 million jobs could be created.

Is it as easy as that??

The authors describe a win-win situation where everybody benefits. But is life ever that easy?

The idea has a whiff of the old "trickle down" theory. If companies can have a trillion dollars, they'll get the economy going and we'll all prosper. I was a very young man the last time "trickle down" was attempted and from my point of view, "trickle" was indeed the right term as most of us in Buffalo, NY in those years saw precious little of any of the supposed prosperity that resulted.

The Obama administration has declared that waving the taxes on overseas profits is tantamount to rewarding companies that move jobs out of the United States. This is too simplistic. U.S. multinational corporations need to be in the countries where they operate in order to be close to their customers and markets. That will never change, no matter how easy we make it to repatriate profits. It's just plain common sense.

But what about those jobs that were moved offshore because overseas workers are cheaper? Will repatriating profits do anything to bring back those jobs? Hardly. Companies are always going to say that they have to be "competitive" in a global economy, that's why they can't hire U.S. workers. Or that U.S. workers just don't have the skills for the jobs that are available (and are apparently untrainable), hence, the need to allow more foreign workers into the country or move the work overseas. And then there are the countries that provide significant incentives to entice U.S. companies to establish factories and research facilities in their countries. How will repatriated profits address that issue?

The bottom line --

Net-net, the authors are most likely correct that the economy would benefit if a trillion dollars was actually repatriated with minimal tax impact; however, it is doubtful that the full trillion dollars would actually come back to the U.S. and it is doubtful that the impact on jobs would be quite as positive as the authors contend.

So this becomes an issue of trying to decide just what it's worth to improve the economy marginally. Give the companies their profits with minimal taxes and allow them to say "trust us" about investing it in the U.S.? We trusted the banks and look how well that worked out for us.

And then you have to wonder what new unintended consequences will come to pass as a result of a tax break on foreign profits. Why wouldn't it be an incentive to do even more business overseas with even more foreign workers? Or just acquire more foreign companies?

As you can see, this is not as clear cut an issue as the authors and many financial bloggers imply. Is the tax too high? Most likely. Will decreasing it juice the economy? Most likely, in the short term. Will it have a lasting positive effect? Who can say?

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, TradingStockAlerts.com and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at Trade-Radar.com

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …