July 29, 2011

Debt Ceiling & Corporate Tax: Big Boys Duke It Out (Guest Post)

By Bruce Krasting

Faye Dunaway had a great line in the movie Chinatown. She said:
"I don’t get tough. My lawyers do."
Some of the biggest titans of industry are currently in brawl over a ton of money. As is usual in America, when powerful forces get into a fight they turn to their lawyers (and lobbyists) to do the actual punching. While this may appear to be civil, it’s not. There’s too much at stake.

The issue is the $1 trillion of earnings that corporate America has piled up outside of our borders. This money represents the profits from foreign activities that have not been repatriated back home. This loot has already been taxed in the foreign jurisdiction where the profits have been made. The average tax on this pile of money is only 12%. To bring the money home would trigger an additional tax liability to the IRS equal to ~23% (35% marginal tax minus 12%, foreign taxes paid).

What’s at stake is $250 billion. With that much money on the table the big hitters get the best lawyers and lobbyists to “Get tough”.

On one side of this slug fest are 50 big companies including Apple, Cisco Systems, Devon Energy, Google, Microsoft, Oracle, and Pfizer. They are jointly represented by a slick lobbying outfit called WinAmerica. (link) This is the mission statement of WinA:

Congress should pass legislation to offer an immediate reduction of taxation on income earned overseas by innovative American businesses to allow that money to be brought home and invested in the United States.

Gee! That sounds smart doesn’t it? Some details from WinAmerica:

Currently, there is over $1 trillion earned by American businesses trapped overseas. An essential first step would be to allow these worldwide American businesses the freedom to bring up to $1 trillion in global earnings home to invest it now into our still fragile economy.

Let’s be very clear on this. GOOG/AAPL/MSFT/GE etc. are pushing for a tax holiday. They want to bring all of their foreign profits back home and pay no US tax. This has been done before and there is very little evidence that those companies who benefited in the past actually invested in the US and created jobs. They paid dividends and reduced debt with most of the money.

On the other side of the tax holiday being pushed by WinAmerica are Kimberly-Clark, Zimmer, United Technologies and Caterpillar. Corporate officers of these big hitters testified on this matter to Congress. This group is arguing against a holiday. From a Newsweek report:

"The four chief financial officers testifying at the hearing said they oppose a one-time repatriation holiday that would allow companies to bring back overseas profits at a reduced rate."

So what’s this really about? Why are the titans of American industry spending big bucks and beating each other up? Enlightened self-interest is the answer.

Apple, Cisco Systems, Devon Energy, Google, Microsoft, Oracle, and Pfizer had a total of $164 billion in accumulated undistributed foreign profits. They want that money in their pockets and they don’t want to pay a penny in taxes. This group is prepared to make concessions regarding future tax benefits (deductions economically related to foreign earnings) in exchange for the cash.

Those apposed to a one-time holiday don’t have the big stash of foreign cash, so a holiday does them no good. In some cases a holiday would create a competitive disadvantage. This group is more interested in maintaining the existing tax structure as it is. They want to keep credits for US located activities of R&D, workforce training, and manufacturing.

So the pissing match between the titans (and their lawyers) is about money. It’s about greed and tax avoidance. Surprised?

I think the scale is going to tip in favor of the nice folks at WinAmerica. This is the argument they are selling:

The likelihood of another stimulus, additional tax cuts, or action by the Federal Reserve is low, and unemployment is still too high.

Providing American businesses with incentives to invest at home is a common sense solution that will immediately inject up to $1 trillion into our economy and provide businesses with the certainty they need to help get Americans back to work.

The first part of this is true. There is no stimulus coming from the monetary or fiscal side. The second part is bullshit. There is a ¼ Trillion of tax revenue at stake. That will be traded for a promise of some jobs in the US. There will be some jobs created as a result. But the cost of a $60,000 job will be $500,000 in the final analysis.

Either way this plays out Corporate America will win, the average American will be the loser.

About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it."  Nowadays, Bruce blogs about his take on financial events at Bruce Krasting.  (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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