America’s Real Corporate Tax Rate = 5.25%
In one of the delicious ironies of modern life, Ralph Nader, the quintessential critic of corporate America, is reported to have sent a letter to John Chambers, the CEO of Cisco, complaining about Cisco’s low dividend. As Mr. Nader points out, Cisco has $43 billion of cash that should be returned to its shareholders. Apparently, Mr. Nader holds 10% of his $3 million portfolio in Cisco stock.
Mr. Chambers is reported to have replied to Mr. Nader that most of the $43 billion is held overseas, out of the reach of US tax collectors. Repatriating the cash would trigger a tax bill to the US government of $15 billion. He apparently asked his corporate crony, Mr. Nader, to put his moral suasion behind a tax holiday for repatriated overseas profits.
As you may recall, when asked by President Obama for ideas of how to bolster the economy, Mr. Chambers suggested a repeated of the Homeland Investment Act of 2005, a temporary tax amnesty program for repatriating overseas profits dreamed up by the Bush Administration. At the suggested repatriation tax rate of 5.25%, Cisco could bring home the cash and only pay a $2 billion tax bill; the other $13 billion could be used to pay Mr. Nader a generous dividend to fund his important criticisms of corporate cronyism.
The Home Investment Act of 2005 is estimated to have motivated US corporations to repatriate $299 billion of overseas profits, resulting in a $90 billion tax holiday. It also caused the dollar to strengthen in 2005, which increased the trade deficit. It did nothing to pay down the Federal deficit in 2005 which was $318 Billion. The New York Times reported that 92% of the repatriated cash was paid to shareholders, not invested in brick and mortar to create jobs.
It is likely that a similar program in 2011 would result in even more ‘tax sheltered’ cash flowing home; Mr. Chambers throw out the number of $1 trillion. This extra cash would be a boon to stock market valuations and make everyone happy. Actually, President Obama would be smarter to propose the Homeland Investment Act of 2012 because then the wealth effect would bolster his ratings in an election year – why waste all that free money on 2011.
In reality, Mr. Chambers call for a new Homeland Investment Act highlights that the real US corporate tax rate is 5.25%, not 35%, regardless of the rhetoric of the US Chamber of Commerce. With the Homeland Investment Act of 2005 as a precedent, any corporate treasurer who does not move profits into tax shelters overseas through transfer pricing should be fired. If a corporate treasurer can rely on Congress to push through such legislation from time to time, then corporations – which are God-like in that they live forever -- just need to wait out the political and economic cycle and they will be rewarded with a 5.25% tax rate.
It would be far more sensible to drop the corporate tax rate to 5.25% for all profits – domestic and overseas -- so that profits, taxes (and maybe jobs) would stay at home.
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