It has become an article of faith that American corporations are sitting on large cash balances that could be invested domestically to stimulate economic growth and job creation.
However, a substantial percentage of liquid assets on corporate balance sheets are effectively off limits due to the antiquated and anticompetitive nature of U.S. tax policy.
Large multinational companies now earn a significant portion of their profits outside the U.S. To repatriate these foreign-earned cash piles, U.S. firms must pay combined state and federal corporate income taxes that can range as high as 39 percent. Typically, any foreign taxes paid can be credited against U.S. levies. But since the tax rate is substantially higher here, current policy actively discourages reinvestment of foreign profits back into the United States.
We are the only major economy that taxes foreign earnings which have already been taxed at the source. Known as a "worldwide" system, it is a remnant of the 1960s when America represented well over half of the world's investment and output. Most other nations use a "territorial" system of taxation that levies imposts on corporate income generated within their borders, but not on earnings from abroad (which are taxed locally). In a globally integrated economy, the outdated U.S. system inhibits domestic investment and retards job creation.
Uncompetitive tax policy creates significant economic distortions. By penalizing repatriation of capital to the U.S., the law encourages American companies to make permanent investments abroad and promote job creation elsewhere. Furthermore, some firms have taken the legal but regrettable decision to move their official domicile outside the United States to more tax-friendly climes such as Switzerland or Bermuda.
Another curious and unanticipated effect has emerged as a result of our ultra-low interest rate policy. Microsoft Corp. recently issued $2.25 billion in debt securities and used the proceeds to pay a dividend, rather than cough up the taxes on billions in profits that sit idly on the balance sheets of their offshore subsidiaries.
In another wacky relic of our arcane tax system, Microsoft's borrowing is partially subsidized by taxpayers, since interest expenses are deductible. Many other large companies have taken similar actions.
U.S. companies have amassed nearly $2 trillion in cash, but half of that stash languishes in tax purgatory outside the U.S. Abolishing the uncompetitive corporate tax on foreign earnings could release a torrent of job-creating investment capital back home.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.