The following topic will be addressed in this post:
Multinational firms have billions of dollars in profits from their operations outside of the United Sates. They are requesting relief from the 35% tax burden in order to return those funds to the United States. What should we do?
At the outset of this post, I want to emphasize that this website is devoted to business. I am not expressing political or partisan viewpoints. I enter this discussion and make the following proposals because I believe they could be helpful to our national and global economies. My viewpoints are not perfect nor are they the complete solution to our economic and social difficulties. I will be happy to receive any feedback that readers want to communicate.
According to estimates, American firms hold about one trillion dollars in profits from operations outside the United States. Many people opine that repatriating these funds would invigorate the sluggish U.S. recovery and reduce the 9% national unemployment figure. Unfortunately, firms are reluctant to repatriate those profits because they dislike the tax rates, which can reach 35%.
Can we resolve this impasse? I offer these thoughts.
For reasons too numerous to list, many people hold a dim view of corporate behavior. As a result, they view the current repatriation debate as simply another example of firms strong-arming pliant political actors at the expense of the American public. Indeed, we faced this same scenario in 2004 and the tax holiday allowed to the corporations generated mixed results.
While I empathize with the sentiments of the skeptical public, I believe that we should contemplate a permanent but targeted tax rate of 15% for repatriated profits. Let me explain my perspective.
Firms are discovering and realizing tremendous opportunities in the developing, emerging, and frontier markets worldwide. Instead of hindering American companies, we should incentivize them to enter and to succeed in these opportunities. Our firms can help to improve the quality of life of residents in these markets. Moreover, our firms will enable people in these markets to contribute as sources of innovation and production that will fuel future global commerce and economic growth. Besides, if American firms do not expand into these markets then some other firms will and we might not like the results.
To capitalize on this realeconomik (my coined term), we should encourage American firms to develop their global operations. Obviously, some foreign-earned profits must be used to further grow foreign operations to serve customers in these markets. But we should also incentivize the firms to repatriate some of these profits. To this end, I suggest a targeted profit repatriation tax rate of 15%, same as the capital gains rate. This rate is targeted because firms will receive this tax rate only if they use the profits for two general goals: to protect their proprietary information or to foster innovation.
First, let’s discuss the proprietary protection goal. For nearly a century, U.S. government policy has been to essentially surrender much of our firms’ proprietary information in order to open foreign markets to trade, examples are Korea and China, or in order to sustain the U.S. global military posture, mostly in the form of retaining privileges to keep military installations worldwide. This policy was tenable while the rest of the globe recovered from two world wars and the U.S. was a net oil exporter and dominated industrial production. The world has changed and continuing this policy will not serve us in the future. Foreign markets are now open permanently and many countries have caught up to us in terms of manufacturing ability and technical knowledge. Therefore, we must better safeguard our patents, intellectual property, and other proprietary information. To accomplish this end, we should offer repatriation tax incentives for firms to produce the sensitive components of their goods and services in the U.S. This policy will help keep people employed and encourage firms to keep making capital improvements to their U.S. plants, properties, and equipment.
Second, let’s discuss the innovation goal. For a variety of reasons, Americans have been among the foremost innovators for two centuries. Also for a variety of reasons, we are losing our place at the vanguard of innovation. We can and must reverse this unsettling trend. To do this, we can incentivize firms to repatriate their profits in order to foster American innovation. Firms can help promote innovation through scholarships, funding basic research, conducting training programs, sponsoring competitions, and other methods. If we want to use them, America has the resources to stay at the leading edge of innovation.
As a complement to both of these general goals, I would support the reduced repatriation tax rate to incentivize firms to employ some of the exemplary American professional talent to design, manage, and execute capital improvement projects in the foreign markets. In addition to factories and office buildings, American firms can use their influence to help create great logistical resources, housing resources, and educational resources to improve the quality of life in the countries where they operate or desire to operate. Not only would this strategy improve the lives and productive capacities of the citizens of these countries, but this strategy would also be a great way to employ some of the American human capital that is currently underutilized.
I believe that this proposal would be acceptable to the business community. Despite the current economic sluggishness, firms remain eager to invest here because America has an exceedingly stable government, copious natural resources, and exceptional human resources. If firms act in good faith to enact the goals of this proposal, I believe that this proposal would be acceptable to the American populace. With regard to reductions U.S. Treasury receipts from this proposal, I would proffer that under the status quo we will not realize the taxes from these corporate profits because firms will continue to hold them off-shore. Additionally, I believe that if this proposal is implemented effectively, this tax reduction could actually “pay for itself” in the form of increased tax volume due to economic growth.
In summary, American firms have large cash hoards on their balance sheets from foreign operations, but much of the cash is subject to a tax burden the firms deem unacceptable. American people need firms to repatriate that cash in an effort to spur economic growth. To align these interests, I support a profit repatriation tax rate of 15% for firms that use the funds to protect their proprietary information and to promote innovation. Further, I support allowing the 15% tax rate when firms use the funds to employ American talent for capital projects in foreign countries.
Bottom Line: I want American companies to make money hand over fist in foreign markets and I want to make it attractive for them to funnel much of that money back into the United States.