Incentives Matter- Tax Negotiations

[Dreadnaught]

Today Obama flatly demanded that tax rates go up in 2013, rejecting a Republican proposal to increase tax revenues by closing loopholes and reducing spending over a ten-year plane.

In case people feel like ranting, I figured I would use this chance to post an example of how tax incentives matter.

December 4, 2012, 1:05 p.m. ET

Top U.S. Firms Are Cash-Rich Abroad, Cash-Poor at Home
By KATE LINEBAUGH

Emerson Electric Co. has $2 billion of cash in the bank. But this year it had to borrow money in the U.S. to help buy back shares, distribute dividends and even pay its taxes.

That's because "substantially all" of Emerson's cash is in Europe and Asia, according to the company's filings with securities regulators. The maker of power-plant and data-center equipment could always bring that cash back home, but it would be taxed at the 35% rate on corporate profits minus whatever tax it has already paid overseas.

As a result, Emerson says, it brings its foreign cash holdings back to the U.S. only if that can be "accomplished tax efficiently." In its most recent fiscal year, that meant bringing back just $500 million, then using debt to cover other obligations.

At a time when American companies hold near record amounts of cash, many are surprisingly cash-poor at home. That doesn't mean they could suddenly run out of money to pay their bills. But it does mean there could be unseen limits on their ability to pay dividends and buy back shares.

With billions of dollars overseas that may never come back, the Securities and Exchange Commission is concerned that companies haven't been presenting investors with an honest appraisal of their liquidity. As a result, regulators are pressing companies to more clearly lay out how much of their cash is in the U.S. and how much is overseas and potentially encumbered by U.S. taxes.

Those disclosures are rolling in, and they are revealing the extent to which U.S. tax policies—along with corporations' efforts to get around them—have distorted American companies' balance sheets.

Illinois Tool Works Inc., a diversified manufacturer, had $2.1 billion in cash at the end of September, but none of that was in the U.S., where it generates more than 40% of its revenue. At the end of last year, Johnson & Johnson kept all of its $24.5 billion in cash outside of the U.S., which accounted for 46% of its revenue generation. General Electric Co. had only about a third of its $85.5 billion in cash in the U.S. at the end of September, even though the U.S. accounted for about 45% of the conglomerate's revenue.

Whirlpool Corp. had 85% of its cash offshore at the end of last year, and Microsoft Corp. had about 87% overseas as of Sept. 30. Truck-parts supplier Wabco Holdings Inc. had only 3% of its cash in the U.S. at the end of last year and is buying back shares with borrowed money, but 91% of its sales are generated overseas.

Each of these companies is grappling with a growing problem that comes from keeping Uncle Sam away from their foreign income: How to round up enough cash in the U.S. to cover items like dividends, share repurchases, debt repayments and pension contributions.

For now, easy borrowing terms give companies some ready options for closing the gap. But having to resort to such workarounds introduces extra risk and expense, that makes some chief financial officers uncomfortable.

"You end up with the really peculiar result where you are borrowing money in the U.S. while you show cash on the balance sheet that is trapped overseas," said Bruce Nolop, former chief financial officer of Pitney Bowes and E-Trade Financial and now a director at Marsh & McLennan . "It is a totally inefficient capital structure."

Illinois Tool Works, Johnson & Johnson, GE, Whirlpool, Microsoft and Wabco declined to comment.

With lawmakers and the White House working to come up with a package of tax increases and spending cuts to trim the deficit and head off the "fiscal cliff," there is new impetus to change the corporate tax structure. There is also broad agreement that the current system, in which foreign earnings are kept offshore and untaxed, isn't working. But lawmakers and businesses disagree on a fix.

The businesses want to pay taxes only in the country where profits are earned. They argue that being able to move their funds back to the U.S. freely would spur capital spending and help create jobs. As part of its proposal to lower the corporate tax rate to 28%, the Obama administration wants to expand the tax on foreign income to all income earned overseas.

In a report earlier this year, J.P. Morgan Chase & Co. analyst Dane Mott found that only about 600 of 1,000 U.S. multinationals that have retained foreign profits overseas broke out how much cash they held outside the U.S. For those companies, it was about $588 billion, or about 60% of their total cash. Meanwhile, America's biggest companies generate only about a third of their revenue outside the U.S., according to Thomson Reuters.

"If shareholders are thinking about cash balances being theirs, they may need to haircut those cash balances," Mr. Mott said. "Cash balances are not necessarily all there—available for dividends and buybacks."

The heavy imbalance between overseas and domestic cash at many U.S. companies in part reflects international expansion into new and sometimes more lucrative markets. Businesses may choose to pile up foreign cash to expand globally, paying for new facilities and overseas acquisitions.

Yet the percentage of cash that companies hold overseas often exceeds the percentage of revenue they generate outside the U.S. Enter the U.S. tax system, which is structured so that companies can cut their tax bill by shifting income offshore to lower-tax countries. The system also discourages companies from bringing home profits earned overseas because of the tax cost.

Emerson has expanded globally and says that 59% of its revenue now comes from outside the U.S. Its sales and earnings fell late last year but have recovered. While virtually all of its cash is overseas, the bulk of its expenses are at home and use all the cash it generates in the U.S.

In the fiscal year that ended Sept. 30, the company spent $2.4 billion on dividends, share buybacks, debt repayment and pension contributions, based on calculations from its regulatory filings. It also paid out $800 million in federal and state taxes, a spokesman said. To cover the obligations, the company increased its commercial paper borrowings to $936 million from $588 million a year earlier and added long-term debt.

"Were it not for a combination of additional debt and repatriated earnings, EMR would likely be facing a shortfall in U.S. cash," J.P. Morgan analyst Steve Tusa wrote recently, referring to Emerson by its stock symbol.

Emerson said it has a "conservative financial structure" that provides strength and flexibility. Keeping cash outside the U.S. doesn't "impede our ability to fund our growth initiatives and cash returns to shareholders," a spokesman said in a written reply to questions.

The SEC is pressing companies on their cash holdings. In a June exchange with Whirlpool, the SEC said that disclosing how much cash is overseas "would illustrate that some investments are not presently available to fund domestic operations such as corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation."

In response, Whirlpool, which holds 85% of its cash in foreign subsidiaries, said its intent is to "permanently reinvest these funds outside of the U.S." If the funds were to be repatriated, Whirlpool said, it "would be required to accrue and pay applicable U.S. taxes."

Diversified manufacturer Dover Corp. has about two-thirds of its cash abroad, while 60% of its revenue comes from the U.S. "Using domestic cash to fund things like debt, dividends, and to grow—sometimes there are constraints," said Brad Cerepak, Dover's chief financial officer.

http://online.wsj.com/article/SB1000...091972730.html

[wiggin]

Today Obama flatly demanded that tax rates go up in 2013, rejecting a Republican proposal to increase tax revenues by closing loopholes and reducing spending over a ten-year plane.

In case people feel like ranting, I figured I would use this chance to post an example of how tax incentives matter.

Uhm? http://www.bbc.co.uk/news/world-us-canada-20602945 Doesn't sound like a flat demand to me.

[Dreadnaught]

Obama Stands by Tax Demand

President Barack Obama said Tuesday that a deal still can get done to avoid the so-called fiscal cliff, but he held firm on his demand that any agreement must include higher income-tax rates for the top earners.

In his first interview since the Nov. 6 election, the president told Bloomberg Television that the proposal offered by House Republicans, which doesn't raise tax rates on upper-income Americans, is out of balance.

"When you look at the math, it doesn't work," Mr. Obama said.

The president said he is prepared to compromise and is willing to consider new ideas on a range of issues, including changes to entitlement programs. But he suggested that the two sides are likely to remain at an impasse until Republicans agree to raise income-tax rates for the top earners.

"What I'm going to need…is an acknowledgment that folks like me can pay a little bit higher rate," he said.

http://online.wsj.com/article/SB1000...998710054.html

Seems to be emphasizing the "rate" thing pretty strongly.

[wiggin]

I don't disagree that Obama would like to see rates increase, but it looks like there's some flexibility on the administration on the details. I think that a sufficiently aggressive increase in revenue from the upper tax brackets without an increase in marginal rates would also meet with his approval - it's just that the proposals from House Republicans haven't raised nearly enough revenue.

I don't disagree that his rhetoric is a bit disturbing, but I wouldn't characterize it as a flat demand. It looks like an opening position for negotiations, just like the House GOP position.



On the broader point, though, I do agree. All other things being equal, it's better to increase revenue through decreasing deductions than by increasing marginal rates. The marginal dollar is what matters here - and most deductions are actually market distortions anyways.

[GGT]

Today Obama flatly demanded that tax rates go up in 2013...

...for top 2% income groups only.

...rejecting a Republican proposal to increase tax revenues by closing loopholes and reducing spending over a ten-year plane.

Closing which loopholes, specifically? Does that reduced spending include Defense?

[GGT]

In case people feel like ranting, I figured I would use this chance to post an example of how tax incentives matter.

My rant begins by saying boo-fucking-hoo to US based multi-national corporations with shareholders like J & J. I own stock shares in the parent company and my sister works under one of their subsidiaries (Ortho Diagnostics), so I have a dual view of the corporation. They're swimming in money, talent, research, innovation, technology, and patents. Globally. They've partnered with states and universities, and offer internships and full scholarships to employees and their children (in certain divisions). They treat their employees well, especially those in management. They have great medical, horticultural, and cosmetic products, and a trusted brand name.

There's no reason a company like J & J couldn't pay more in corporate taxes, or have their executives or employees paying more in income taxes....to fund public investment in infrastructure, education, healthcare. They're no longer a "family company" that sells furniture wax or medical bandages.

[GGT]

My rant ends with proposing a War Tax. If that sounds too harsh, then let's call it a Military Engagement Tax. Any time the US spends funds or deploys military personnel that isn't directly related to National Security defense would mean an automatic tax hike. It could be a national sales tax, consumer tax, corporate or income tax.

To pay for the endeavor, whether or not it's been officially declared "War" by congress, an automatic revenue tax would be initiated. Then we wouldn't be trotting around the world acting as a police force, and we wouldn't try to figure out how to pay for unfunded Wars after the fact.

[Asmodian]

I do not understand the rant, as far as I am aware income is taxed in the country where it is generated. The location of actual funds has no bearing on it. Do they mean these companies have moved cost centers overseas such as R&D and and charge the us entity for them thus transferring profits?

[Wraith]

I do not understand the rant, as far as I am aware income is taxed in the country where it is generated. The location of actual funds has no bearing on it. Do they mean these companies have moved cost centers overseas such as R&D and and charge the us entity for them thus transferring profits?

Income is taxed where it's generated, but the US also taxes any money that was generated in another country, if the owner tries to bring any of it into to the US. The US also has one of the highest corporate tax rates in the developed world. The combined result is that US companies try to make as much of their profits as possible outside the US, while keeping profits within the US low or near zero by managing where their costs are, and not letting any of that overseas profit come back over.

[Aimless]

Income is taxed where it's generated, but the US also taxes any money that was generated in another country, if the owner tries to bring any of it into to the US. The US also has one of the highest corporate tax rates in the developed world. The combined result is that US companies try to make as much of their profits as possible outside the US, while keeping profits within the US low or near zero by managing where their costs are, and not letting any of that overseas profit come back over.

What's the effective corporate tax rate?

[Wraith]

I'm not sure, it'd probably depend on how you measure it, but you're thinking along the wrong lines. I just explained how the system incentivizes tax avoidance, to the detriment of the country. The problem that is here is due to the lengths corporations are going to avoid paying the nominal tax rate.

[Aimless]

I'm not sure, it'd probably depend on how you measure it, but you're thinking along the wrong lines. I just explained how the system incentivizes tax avoidance, to the detriment of the country. The problem that is here is due to the lengths corporations are going to avoid paying the nominal tax rate.

I'm just having a hard time seeing this particular issue as a problem of federal taxation policy--spec. the nominal corporate income tax, which is usually more than 10% greater than the effective corporate income tax rate, and thus in line with or better than many OECD countries--rather than as a consequence of eg. accounting rules and, well, of business culture.

US corporations are already sitting on a huge pile of liquid assets at home, about as large as the pile they have overseas. What good would repatriation of those overseas profits do, really?

US corporations already have various ways to use overseas profits in the US without paying anything even remotely close to the nominal tax rate (like, a few percent at most). Completely removing the nominal tax on repatriated profits would, in that case, reduce the small amount of revenue raised from such activities even further.

One might argue that the solution would involve just removing all tax incentives for shifting profits from the US overseas, but how're you going to accomplish that without actually turning the US into an actual tax haven that barely raises any money at all from corporate profits? As long as you try to tax corporate profits, countries that can act as tax havens will be at an advantage in the competition for holding at least some of your corporate cash.

Trying to be nice to corporations by removing the things we believe they dislike in the hopes of getting more money and business from them... isn't the solution. Corporations will attempt to maximally exploit everything they can exploit, and they will be required to do so by their shareholders. The solution is to diminish the potential rewards of sneakiness, to pen them in. If you must. If your enemy goes to ground, leave no ground to go to.

[Ziggy Stardust]

The White House also signalled that it might agree to increase taxes for the wealthiest earners to less than 39.6%.
Spokesman Jay Carney left open the option that rates would not have to rise to that Clinton-era level.

Oh no! Not the socialist Clinton era level

rejecting a Republican proposal to increase tax revenues by closing loopholes and reducing spending over a ten-year plane.

It called for increased tax revenue of $800bn over a decade, but would keep current tax cuts in place - including those for wealthier earners. The offer did not specify how the new revenue would be found.


The proposal also suggested raising the eligibility age for Medicare - a government-sponsored health programme for senior citizens - and changing the way the Social Security pension scheme makes inflation adjustments.

Can't raise taxes for the top 2% to below Clinton era levels to less than 39.6%, but we can squeeze them ol' people?

[Wraith]

I'm just having a hard time seeing this particular issue as a problem of federal taxation policy--spec. the nominal corporate income tax, which is usually more than 10% greater than the effective corporate income tax rate, and thus in line with or better than many OECD countries--rather than as a consequence of eg. accounting rules and, well, of business culture.

It's a tax policy issue because companies are doing exactly what we're encouraging them to do. We're threatening to beat them with a stick if they do anything different, so there's no sense in being surprised that they do the things that don't get them beaten with a stick.

US corporations are already sitting on a huge pile of liquid assets at home, about as large as the pile they have overseas. What good would repatriation of those overseas profits do, really?

Did you read the article in the opening post? They don't have huge piles of liquid assets at home if they have the ability to keep that money abroad. And this discussion is going to be silly if I have to explain why it's better for an economy to have more and easier to access wealth.

US corporations already have various ways to use overseas profits in the US without paying anything even remotely close to the nominal tax rate (like, a few percent at most). Completely removing the nominal tax on repatriated profits would, in that case, reduce the small amount of revenue raised from such activities even further.

One might argue that the solution would involve just removing all tax incentives for shifting profits from the US overseas, but how're you going to accomplish that without actually turning the US into an actual tax haven that barely raises any money at all from corporate profits? As long as you try to tax corporate profits, countries that can act as tax havens will be at an advantage in the competition for holding at least some of your corporate cash.

Is this what you're really concerned about? That the US might become more globally competitive, and there'd be fewer reasons to keep money in and filter money through other countries? If so, you can relax, the European economy isn't quite so weak that it's only being kept alive by American companies who are afraid of taxes back home.

Trying to be nice to corporations by removing the things we believe they dislike in the hopes of getting more money and business from them... isn't the solution. Corporations will attempt to maximally exploit everything they can exploit, and they will be required to do so by their shareholders. The solution is to diminish the potential rewards of sneakiness, to pen them in. If you must. If your enemy goes to ground, leave no ground to go to.

Why is it that in so many other arenas, such as with criminal rehabilitation, you express preferences towards using carrots to influence behavior, but as soon as we start talking about the wealthy or corporations, the only tool you'll consider is the stick? It's silly to threaten to beat corporations with a stick if they try to bring any money into the US, and then when you find out that they're trying not to bring any money into the US, threatening to beat them with an even bigger stick if they don't start. It would be more productive to simply stop financially punishing them for doing things that are good for society and the economy.

[Aimless]

Just a short note: they do in fact have a huge pile of liquid assets at home, last I heard it amounted to ca. 2 trillion USD. They also have cash abroad. A large amount of that cash does nevertheless find its way back to the US without being taxed to any great extent, through the creative use of loopholes by assorted subsidiaries. There is no real cash shortage in the US for multinational corporations. When they need to, they have effective ways to bring their money home. The big question is whether or not repatriation of profits by MNCs really (in practice) creates more jobs or anything else of value to anyone but those who benefit from eg. companies buying back their own stock.

[Aimless]

It's a tax policy issue because companies are doing exactly what we're encouraging them to do. We're threatening to beat them with a stick if they do anything different, so there's no sense in being surprised that they do the things that don't get them beaten with a stick.

What you're really doing is giving them great ways to do exactly what you don't want them to do, eg. by having rules and regulations that permit creative accounting.

Did you read the article in the opening post? They don't have huge piles of liquid assets at home if they have the ability to keep that money abroad. And this discussion is going to be silly if I have to explain why it's better for an economy to have more and easier to access wealth.

See above. My argument isn't that it's bad for an economy to have access to wealth. My point is that your economy does have access to wealth. The article is presenting a narrative that is incorrect.

Is this what you're really concerned about? That the US might become more globally competitive, and there'd be fewer reasons to keep money in and filter money through other countries? If so, you can relax, the European economy isn't quite so weak that it's only being kept alive by American companies who are afraid of taxes back home.

What? my point is that as long as you have an effective corporate tax rate over zero there will be countries who will be more attractive to MNCs for storing cash. I don't mean the EU, I mean places like Puerto Rico. I'm not worried, I'm saying that you're not going to accomplish what you want to accomplish simply by adjusting your approach to these taxes a little.

Why is it that in so many other arenas, such as with criminal rehabilitation, you express preferences towards using carrots to influence behavior, but as soon as we start talking about the wealthy or corporations, the only tool you'll consider is the stick? It's silly to threaten to beat corporations with a stick if they try to bring any money into the US, and then when you find out that they're trying not to bring any money into the US, threatening to beat them with an even bigger stick if they don't start. It would be more productive to simply stop financially punishing them for doing things that are good for society and the economy.

For starters, you must understand that corporations aren't actually people nor do they behave like most regular people. They routinely behave like, well, extremely greedy short-sighted sociopaths. I say this not to condemn but to raise the point of corporations behaving differently to most regular (and real) people and thus perhaps requiring a less loving different approach. I don't imagine for a second that a real sociopath will be rehabilitated through the liberal use of carrots, nor do I imagine that a corporation will be rehabilitated through the liberal use of carrots.

Moreover, I am not talking about punishment, I am talking about imposing constraints across the board, limiting corporations scope to engage in particularly undesirable behaviour (eg. through creative accounting for the purposes of avoiding regular taxes). Punishment doesn't work. Reducing the scope for shenanigans may work better. If you want an analogy I suppose life in prison may be an acceptable one. Sentencing a dangerous criminal to life in prison isn't just a punishment and a deterrent--it's also an effective way to make sure he can't easily go around harming people no matter how much he'd like to.

If you want corporations to stop avoiding taxes limit their ability to avoid taxes through creative accounting and the exploitation of loopholes in a tax-code that's been bought and paid for by special interests. Across the board. They'll be just fine if actually paying taxes really becomes a necessary and expected cost of doing business in the US, much like paying damages for engaging in fraud etc.

[Aimless]

Some background:

http://www.forbes.com/sites/beltway/...t-create-jobs/

More:

http://money.cnn.com/2011/10/14/news..._tax/index.htm

From the Heritage Foundation of all places:

http://www.heritage.org/research/rep...ay-create-jobs

[Wraith]

Some background:

http://www.forbes.com/sites/beltway/...t-create-jobs/

More:

http://money.cnn.com/2011/10/14/news..._tax/index.htm

From the Heritage Foundation of all places:

http://www.heritage.org/research/rep...ay-create-jobs

You should perhaps read these, since they're all arguments about temporary tax relief. The argument is that a temporary reprieve won't help very much, that it needs to be permanent to really help. Here:

So, rather than a temporary tax holiday, a better approach would be to consider a step toward permanent, forward-looking territoriality. In practice, territoriality may be achieved simply by allowing companies an explicit exemption for some or all of their repatriated earnings.Thus, in lieu of a tax holiday, policymakers might consider allowing some percentage, perhaps 10 percent or more, of future foreign earnings to be permanently exempt from U.S. tax as a starting point.

A permanent, partial exemption would be an important step toward full territoriality. In contrast to a one-time repatriation tax holiday, a permanent partial exemption would prospectively alter the incentives for U.S. companies to engage in international commerce. These companies would be more competitive in global markets, enhancing their incentives to invest more at home and abroad.

It makes sense. We're trying to influence behavior here. So saying "we'll forgive you for doing it this once, but we're still planning to punish you if you try to do it again in the future" isn't going to have as much impact as just saying we won't be punishing them for repatriating cash in the future. It converts what could have been a long-term funding strategy to a one-time windfall.

It's true that US companies have other ways to get cash. This was also mentioned in the article in the OP. They can leverage assets that never left the shores, take out loans, and leverage the markets. However, I assert that this is not the best thing for society if the organizations in question could have funded it themselves if they were allowed to repatriate money freely, like in most other countries. They could have funded it themselves, giving them better profits while generating the same societal benefits, but they would have done it without increasing the demand on money, thus leaving more of it available for organizations that couldn't fund such things themselves.

[Wraith]

For starters, you must understand that corporations aren't actually people nor do they behave like most regular people. They routinely behave like, well, extremely greedy short-sighted sociopaths.

I actually treat them in my head like non-sentient genetic algorithms in this particular case! Which means they'll fulfill the selection criteria you set out exactly and through the path of least resistance. Which in turn means you have to be very careful in selecting your reward/punishment scheme, because they'll do whatever they can to get the most reward and the least punishment, regardless of the intent of your structure.

For instance, the idea behind the repatriation tax is to make sure that companies don't escape high US taxes just by making profits abroad instead. The result was that companies just try not to repatriate, because that's better for them than just making all their profits in the US.

I say this not to condemn but to raise the point of corporations behaving differently to most regular (and real) people and thus perhaps requiring a less loving different approach. I don't imagine for a second that a real sociopath will be rehabilitated through the liberal use of carrots, nor do I imagine that a corporation will be rehabilitated through the liberal use of carrots.

You keep going back to terminology like that. "If your enemy goes to ground, leave no ground to go to." Perhaps this is part of the problem. Maybe you should stop thinking of corporations as the enemy to be defeated even if it means scorching the earth, as criminals that need to be rehabilitated, and maybe try to think of them more as financially motivated organizations that can be worked with for mutual benefit.

Moreover, I am not talking about punishment, I am talking about imposing constraints across the board, limiting corporations scope to engage in particularly undesirable behaviour (eg. through creative accounting for the purposes of avoiding regular taxes). Punishment doesn't work. Reducing the scope for shenanigans may work better. If you want an analogy I suppose life in prison may be an acceptable one. Sentencing a dangerous criminal to life in prison isn't just a punishment and a deterrent--it's also an effective way to make sure he can't easily go around harming people no matter how much he'd like to.

If you want corporations to stop avoiding taxes limit their ability to avoid taxes through creative accounting and the exploitation of loopholes in a tax-code that's been bought and paid for by special interests. Across the board. They'll be just fine if actually paying taxes really becomes a necessary and expected cost of doing business in the US, much like paying damages for engaging in fraud etc.

Why don't you just come out and say what strict constraints you're talking about?

Side note: I roll my eyes whenever somebody whines about special interests now. Especially "bought and paid for by special interests".

[Dreadnaught]

My rant begins by saying boo-fucking-hoo to US based multi-national corporations with shareholders like J & J. I own stock shares in the parent company and my sister works under one of their subsidiaries (Ortho Diagnostics), so I have a dual view of the corporation. They're swimming in money, talent, research, innovation, technology, and patents. Globally. They've partnered with states and universities, and offer internships and full scholarships to employees and their children (in certain divisions). They treat their employees well, especially those in management. They have great medical, horticultural, and cosmetic products, and a trusted brand name.

There's no reason a company like J & J couldn't pay more in corporate taxes, or have their executives or employees paying more in income taxes....to fund public investment in infrastructure, education, healthcare. They're no longer a "family company" that sells furniture wax or medical bandages.

If they were able to more easily shift revenue to the US, they could invest in more talent, better-paid talent, etc. Instead, they can't justify the massive amount of paperwork and tax liability so they keep money offshore.

Companies always want to find productive uses of cash, but they aren't even going to try if that cash (which they already earned and paid taxes on) is still behind a tax wall that is entirely unique to the US.

I'm just having a hard time seeing this particular issue as a problem of federal taxation policy--spec. the nominal corporate income tax, which is usually more than 10% greater than the effective corporate income tax rate, and thus in line with or better than many OECD countries--rather than as a consequence of eg. accounting rules and, well, of business culture.

US corporations are already sitting on a huge pile of liquid assets at home, about as large as the pile they have overseas. What good would repatriation of those overseas profits do, really?

US corporations already have various ways to use overseas profits in the US without paying anything even remotely close to the nominal tax rate (like, a few percent at most). Completely removing the nominal tax on repatriated profits would, in that case, reduce the small amount of revenue raised from such activities even further.

One might argue that the solution would involve just removing all tax incentives for shifting profits from the US overseas, but how're you going to accomplish that without actually turning the US into an actual tax haven that barely raises any money at all from corporate profits? As long as you try to tax corporate profits, countries that can act as tax havens will be at an advantage in the competition for holding at least some of your corporate cash.

Trying to be nice to corporations by removing the things we believe they dislike in the hopes of getting more money and business from them... isn't the solution. Corporations will attempt to maximally exploit everything they can exploit, and they will be required to do so by their shareholders. The solution is to diminish the potential rewards of sneakiness, to pen them in. If you must. If your enemy goes to ground, leave no ground to go to.

Just a short note: they do in fact have a huge pile of liquid assets at home, last I heard it amounted to ca. 2 trillion USD. They also have cash abroad. A large amount of that cash does nevertheless find its way back to the US without being taxed to any great extent, through the creative use of loopholes by assorted subsidiaries. There is no real cash shortage in the US for multinational corporations. When they need to, they have effective ways to bring their money home. The big question is whether or not repatriation of profits by MNCs really (in practice) creates more jobs or anything else of value to anyone but those who benefit from eg. companies buying back their own stock.

I agree with most of what Wraith said, but a few points-

1) I don't see how converting the US to a territorial tax haven just like every other country in the world (including yours) would turn the US into a "tax haven".

2) I think you're underestimating the complexity of bringing that money back, not just the actual tax rate. Tax rates alone aren't the only incentive here. In fact, one of the main Republican negotiating points in our current political debate here is they would be willing to accept more revenue to government if the tax rates stayed the same, but the complexity of the tax code was reduced (which would lead to fewer loopholes).

3) One important point in the WSJ article I posted is that the actual amount of cash on the balance sheets of US corporations may not be nearly as large as anyone thinks, because many firms don't break-out the geographic distribution of that cash. Also, $2 trillion isn't really a ton of cash in an economy that has assets worth tens of trillions of dollars.

[Aimless]

If they were able to more easily shift revenue to the US, they could invest in more talent, better-paid talent, etc. Instead, they can't justify the massive amount of paperwork and tax liability so they keep money offshore.

They already have money in the US, they can fairly easily shift money BACK to the US, or they could simply not shift money out of the US in the first place. When they have something in which they want to invest large amounts of money, they do so. When they don't, they let it pile up. If they let too much of it pile up in the US, they have to pay the tax-man, not only for the profit but also for letting too much money pile up.

Companies always want to find productive uses of cash, but they aren't even going to try if that cash (which they already earned and paid taxes on) is still behind a tax wall that is entirely unique to the US.

"Productive uses of cash" can mean a lot of things. For a lot of companies it may mean simply paying out juicy dividends even in bad times, or fiddle with their valuation and how they look to shareholders and potential investors. They have a large pile in the US and a similarly sized pile abroad.

Which cash are you saying they paid taxes on? How much in taxes? For some of your largest multinational companies, you're looking at an effective tax rate globally of under 10%, accomplished through shifting profits to tax-havens from other overseas markets. They don't pay much more in income tax in the rest of the world than they do in the US.

I agree with most of what Wraith said, but a few points-

1) I don't see how converting the US to a territorial tax haven just like every other country in the world (including yours) would turn the US into a "tax haven".

It wouldn't turn the US into a tax-haven; that was the point. As long as there are actual tax havens to which MNCs can shift their profits and hoard them indefinitely, the US won't be able to compete on the same terms for any money that MNCs don't actually want to invest in the US. If you want much more of that money, then, by all means, turn your country into an actual tax-haven. But then you may have to resign yourself to

2) I think you're underestimating the complexity of bringing that money back, not just the actual tax rate. Tax rates alone aren't the only incentive here. In fact, one of the main Republican negotiating points in our current political debate here is they would be willing to accept more revenue to government if the tax rates stayed the same, but the complexity of the tax code was reduced (which would lead to fewer loopholes).

Just so we're clear, the relation is as follows: fewer loopholes --> less complexity. We're on the same page re. complexity of tax-code and re. loopholes. I don't think that tax-rates are the only incentive here.

But who do you think supports the creation of loopholes? Who do you think works to keep them in place when the time comes for them to be reviewed and removed? Keeping them in place may make for a complex and extraordinarily leaky tax-code, but that's a great thing for MNCs that can profit greatly from the complexity. There's a lot of money in actively exploiting that complexity. What, do you think corporations wake up in the morning and think, "Ugh, I'm tired, my head hurts, I can't be arsed to exploit the system in order to save billions of dollars and use it to look good/pay shareholders," as if they're people?

You'd think that the above would only apply to the complexity of shifting money out of the US, but applies just as much to bringing money back. Wraith and assorted commentators have suggested various ways to encourage companies to repatriate overseas profits while having non-zero taxation. How do you think such incentives compare to zero taxation? As it is now, companies can shift profits out of the US and save a great deal in evaded taxes. Similarly, they can fairly easily sneak money into the US eg. by pretending it's an extremely favorable short-term loan from one subsidiary to another, without paying anything much in taxes.

Companies keeping their profits overseas in tax-havens isn't simply due to the complexity of repatriating money. They actively work to shift their US profits overseas, and, if they didn't, they wouldn't have to deal with the complexity of repatriation. They also actively exploit loopholes that let them shift money back into the US for doing business.

3) One important point in the WSJ article I posted is that the actual amount of cash on the balance sheets of US corporations may not be nearly as large as anyone thinks, because many firms don't break-out the geographic distribution of that cash. Also, $2 trillion isn't really a ton of cash in an economy that has assets worth tens of trillions of dollars.

The $2trillion number is via the IRS's estimate of how big the domestic pile is. The offshore pile may be similarly sized (in which case, why're we so much more worried about it?) or much larger, estimates vary greatly. Much of that offshore pile may still be in the form of liquid assets that are a part of the American economy.

[Wraith]

They already have money in the US, they can fairly easily shift money BACK to the US, or they could simply not shift money out of the US in the first place. When they have something in which they want to invest large amounts of money, they do so. When they don't, they let it pile up. If they let too much of it pile up in the US, they have to pay the tax-man, not only for the profit but also for letting too much money pile up.

They don't shift money out of the US, the main concern I and I assume Dread are talking about is money that was generated outside of the US. Shifting profit generation back into the US is not something that is easily or quickly done.

Just so we're clear, the relation is as follows: fewer loopholes --> less complexity. We're on the same page re. complexity of tax-code and re. loopholes. I don't think that tax-rates are the only incentive here.

But who do you think supports the creation of loopholes? Who do you think works to keep them in place when the time comes for them to be reviewed and removed?

Some of them are there because they support behaviors our government wants to encourage, others are there because there's nothing we can do about it. For example, the "loophole" that lets companies get away with shifting profits overseas is there by international agreement, and there's nothing we can do about it. Another "loophole" is a tax write-off for exploratory mining operations, which is there because it's expensive and extremely risky, but the government thought that we needed to do more of it because finding new resources within the US has a very strong cascading effect on the economy.

The term "loophole" is very ambiguous, and I think it's starting to get abused to the point of getting in the way of real discussion. I'm not blaming you for it, and I know I've used the term in the past, but I really wish we could get away from it when discussing specific issues on tax policies. The ambiguity in the term is hiding all the real complexity in issues by trying to lump everything together behind a single negatively-charged veil.

You'd think that the above would only apply to the complexity of shifting money out of the US, but applies just as much to bringing money back. Wraith and assorted commentators have suggested various ways to encourage companies to repatriate overseas profits while having non-zero taxation. How do you think such incentives compare to zero taxation? As it is now, companies can shift profits out of the US and save a great deal in evaded taxes. Similarly, they can fairly easily sneak money into the US eg. by pretending it's an extremely favorable short-term loan from one subsidiary to another, without paying anything much in taxes.

Companies keeping their profits overseas in tax-havens isn't simply due to the complexity of repatriating money. They actively work to shift their US profits overseas, and, if they didn't, they wouldn't have to deal with the complexity of repatriation. They also actively exploit loopholes that let them shift money back into the US for doing business.

The incentive to shift profit generation overseas is an issue, it's something almost all countries have to deal with, and it's a tricky one to deal with for reasons that I think you understand. The repatriation issue is the one I'm more concerned about at the moment, mostly just because it seems so much easier to solve. It's a problem that not many countries outside of the US have to deal with at all, and we should be following their example. We should tackle the incentive to shift profit generation, but in the mean time we can at least make it so that if companies do do that, we don't give them a hard time bringing the money back. And I'm not sure this paragraph is really useful, since I'm not even sure how much we still disagree here.

The $2trillion number is via the IRS's estimate of how big the domestic pile is. The offshore pile may be similarly sized (in which case, why're we so much more worried about it?) or much larger, estimates vary greatly. Much of that offshore pile may still be in the form of liquid assets that are a part of the American economy.

Can you find a source on that? I looked, and everything I found implied that the $2 trillion was total assets held by all US companies, not domestic assets. Also of note is that that number is for all US companies, not just multinationals. WSJ above says that of all the multinational companies that could be measured, an average of ~60% of total liquid assets are kept overseas, while ~33% of profit generation takes place overseas.

[Dreadnaught]

Wraith addressed things well, but just to add-on --

Beyond the abuse of the word "loophole", I think it's also important that we not build a tax policy around the belief that we can understand a company's cash needs. This idea that companies have "too much" cash or couldn't possibly have use for the cash that could be on their US/non-US balance sheets isn't really a productive way to think about things. We don't have perfect knowledge of a company's intensions or potential and we shouldn't be building policies around the assumption that certain amounts of money are somehow more than the company would need. The idea is a company's potential is limitless, so the government should quickly and easily take its cut and the step aside.

I hate to fetishise Apple, but what if Apple had total access to its $100 billion cash hoarde in the US? Who the hell knows what crazy stuff they would try? Maybe they would build a new generation of cars. Come to think of it, that sounds sort of like what Google is actually doing with their robotic car project. If these multinationals had access to their full cash pile, they could make some pretty serious investments. Or not make the investments. The point is that the healthiest approach is to not start second-guessing their every financial move with a tax headache.

You'd think that the above would only apply to the complexity of shifting money out of the US, but applies just as much to bringing money back. Wraith and assorted commentators have suggested various ways to encourage companies to repatriate overseas profits while having non-zero taxation. How do you think such incentives compare to zero taxation? As it is now, companies can shift profits out of the US and save a great deal in evaded taxes. Similarly, they can fairly easily sneak money into the US eg. by pretending it's an extremely favorable short-term loan from one subsidiary to another, without paying anything much in taxes.

Seems like a pretty complex thing to do that inevitably would attract some level of scrutiny. It's not sneaking money in the US, it's incurring a substantial amount of opportunity cost and risk to try and deploy capital that's already been earned. And it seems like an example of the lengths organizations go through to avoid double-taxation of their money. When the tax code is so complex, it invites behavior that seems less than straightforward but makes total sense. In other words, incentives matter.

[GGT]

Side note: I roll my eyes whenever somebody whines about special interests now. Especially "bought and paid for by special interests".

...The term "loophole" is very ambiguous, and I think it's starting to get abused to the point of getting in the way of real discussion. I'm not blaming you for it, and I know I've used the term in the past, but I really wish we could get away from it when discussing specific issues on tax policies. The ambiguity in the term is hiding all the real complexity in issues by trying to lump everything together behind a single negatively-charged veil.

But these tax code "loopholes" were added to appease "special interest" groups with a lot of political clout. The incentives for the politician-legislator is a combination of big donor money, powerful group constituencies, and state pork. The veil covers a lot of territory with conflicting interests.

ie, Accountants and tax attorneys don't have an incentive to simply or streamline the tax code, but they do have lobbyists that network with bankers, international corporations, domestic housing industry, even municipal agencies....who have an incentive to push for special deductions or tax relief.

The NYT is running a series on The United States of Subsidies, illuminating the tax incentives given to business, in order to attract their business to their state, often with counter-productive results.

...We don't have perfect knowledge of a company's intensions or potential and we shouldn't be building policies around the assumption that certain amounts of money are somehow more than the company would need. The idea is a company's potential is limitless, so the government should quickly and easily take its cut and the step aside.

...If these multinationals had access to their full cash pile, they could make some pretty serious investments. Or not make the investments. The point is that the healthiest approach is to not start second-guessing their every financial move with a tax headache.

Seems like a pretty complex thing to do that inevitably would attract some level of scrutiny. It's not sneaking money in the US, it's incurring a substantial amount of opportunity cost and risk to try and deploy capital that's already been earned. And it seems like an example of the lengths organizations go through to avoid double-taxation of their money. When the tax code is so complex, it invites behavior that seems less than straightforward but makes total sense. In other words, incentives matter.

I think the policy debate is trying to incorporate ethical incentives -- fairness, continuity, social responsibility, sustainability, even national patriotism -- that are win/win for businesses as well as workers. It's complex. Another way to state this: what lengths should multi-national corps go toward investing in people, not just their bottom line and profit margin? If they're all about tax subsidies and special tax "loopholes", they're not investing in public services like infrastructure, education or healthcare. That extraction isn't sustainable.

[Dreadnaught]

All the "ethical incentives" you listed sound like a lot of left-wing hogwash and xenophobic protectionism. The NYT subsidies series just demonstrates yet again that incentives matter. The states would be better-off creating a positive overall business climate; there would always be some level of competition between states (which is a good thing) but hunting for incentives wouldn't be suck a freaking industry if certain states focused on their overall business climate. EG, Illinois which has made its business and tax climate progressively worse, but has heaped tax subsidies on its name-brand companies to prevent headlines about big-name companies going out the door.

[Hazir]

I think the solution for this problem is quite simple; the US treasury should stop treating US citizens as indentured creatures that owe them taxes on their income no matter where they generate this income. It would be a lot less punitive then for individuals and companies to repatriate money to the US.

[Veldan Rath]

I think the solution for this problem is quite simple; the US treasury should stop treating US citizens as indentured creatures that owe them taxes on their income no matter where they generate this income. It would be a lot less punitive then for individuals and companies to repatriate money to the US.

I am intrigued, and would like to know more on this.

[GGT]

All the "ethical incentives" you listed sound like a lot of left-wing hogwash and xenophobic protectionism.

And the "capital incentives" you support sound a lot like right-wing bat shit crazy Corporate Croneyism, posing Capitalism as the religion, profits as prophets, idolizing money.

The NYT subsidies series just demonstrates yet again that incentives matter. The states would be better-off creating a positive overall business climate; there would always be some level of competition between states (which is a good thing) but hunting for incentives wouldn't be suck a freaking industry if certain states focused on their overall business climate. EG, Illinois which has made its business and tax climate progressively worse, but has heaped tax subsidies on its name-brand companies to prevent headlines about big-name companies going out the door.

Not all incentives are the same. Even city managers complain about perverse "competition" that has the tail wagging the dog....with corporations moving between states (but only a few miles, across a border) for special favors, that don't translate to an overall positive climate (Missouri vs Kansas).

NY state does the same thing, with NYC giving huge "incentives" that smaller cities can't "compete" with. Then your NYC -- CITY-- taxes go up to pay for the revenue gaps. It's cost shifting, and extractionary. Yes, that has ethical components that can't be ignored.

[Hazir]

I am intrigued, and would like to know more on this.

Know what? There is nothing to know about this; the IRS works from the premise that all income earned by American citizens and companies should be taxed by the US. There are exceptions laid down in treaties, but they don't solve the problem. The IRS should only tax income earned in the US so that people can freely repatriate their funds if they wish to do so. Of course that would cause some grumbling about fat cats having Swiss bank accounts, but in the bigger picture I think it's better for the US if it accepts that.

[Veldan Rath]

Hey, it sounds like simplifying the tax code and that works for me!