Tuesday, October 26, 2010

A $1 trillion idea to create 2 million jobs

The CEO of Cisco, John Chambers, and President of Oracle, Safra Catz, have proposed to President Obama that revising the income tax code would create a flood of dollars into the United States.

They wrote in the Wall Street Journal:
One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.
But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.

The U.S. government's treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That's because those countries realize that choking off foreign capital from their economies is decidedly against their national interests.
We need to be competitive in the world, and our tax code and to some degree our over-regulation, prevents companies from using more of their dollars and resources here. Chambers and Catz go on:
Many commentators have pointed to the large cash balances sitting on U.S. corporate books as evidence that the economy is still stalled because companies aren't spending. That analysis misses the point. Large cash balances remain on U.S. corporate books because U.S. companies can't spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability.

Especially with corporate bond rates falling below 4%, it's hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40%.

By permitting companies to repatriate foreign earnings at a low tax rate—say, 5%—Congress and the president could create a privately funded stimulus of up to a trillion dollars. They could also raise up to $50 billion in federal tax revenue. That's money the economy would not otherwise receive.

We all know that the tax code needs reform. Let's do it now. Of course, an article in the WSJ is a start of awareness, but we need to hammer on Congress to quit groveling to special interests. Maybe after next Tuesday, they might get the message. Don't hold your breath, though.

As Ronald Reagan once said: "Government isn't the solution. Government is the problem."

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