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The Impact of Corporate Dollars Coming Home

The Impact of Corporate Dollars Coming Home

One of the little known facts of last year’s tax bill – well, little known except outside of the corporate world – is that U.S. companies will be permitted to repatriate profits in 2005 at a reduced tax rate. The traditional corporate tax rate is 35% but provisions of the legislation allow profits to be repatriated at 5.25%…wow!

It’s clear why The White House wants this money in the U.S. instead of overseas. The tax revenue that will be generated is paltry compared to the political capital it will provide should the money be used for such things as R&D, investments in new plant and equipment, etc. The irony is that certain uses for this money are precluded – uses that, if allowed, would boost stock prices and, thus, help the “ownership society”. Specifically, guidelines released on January 13th specifically preclude companies from using repatriated dollars for dividends and stock buybacks.

In his attempt to unseat President Bush, Senator John Kerry painted corporate executives as cunning cheats who exploited tax loopholes to avoid taxation of profits. Maybe there is a smattering of truth in that.

However, there are legitimate reasons why a U.S. company might leave foreign profits overseas – the escaping of income taxation being nothing more than a side benefit. For example, companies will often try to match foreign denominated assets with foreign denominated liabilities as a currency hedge.

So let’s assume for a moment that Senator Kerry is right in painting corporations as evil. Let’s assume that the current administration’s attempt to lure dollars back to the U.S. is successful. What’s the impact?

First, foreign currencies will be sold in order to convert these “reinvested profits” into U.S. Dollars. The Dollar should reverse course and stop its current downward trend, right? Wrong! Estimates are that close to $100 billion could be brought back into the U.S. This is but a fraction of the daily – yes, daily – trading volume on foreign exchange markets. Look elsewhere as there’s not going to be an impact on the Dollar.

OK, well what about debt repayment? Will companies continue to strengthen their balance sheets? Nope, not gonna happen! Interest rates remain at historical lows which only entices companies to increase their debt levels. Even companies with lots of cash are locking in long-term financing. Warren Buffett’s Berkshire Hathaway recently floated a $3.5 billion debt offering even with $40 billion of cash already on the balance sheet!

If you want to consider this from a broader perspective, consider that cash on hand in Corporate America is estimated at close to $1 trillion.

Repatriating $100 billion amounts to a drop in the bucket. Sure, 10% is a nice number but just how meaningful is it? – and if you’re itching to say very meaningful, ask your server how he/she feels about the 10% tip you left.

Having 20/20 hindsight is a wonderful thing and I’m sure we’ll all look back on 2005 to see just how much of an impact repatriated profits had on the economy. However, you’ll have to excuse us if we remain skeptical for the moment. We see nothing more than political posturing at the expense of real economic policy. Way to go George!

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As an aside, you may want to note that this piece is far from supportive of White House policy. Many of you have written to us in the past to complain about our “conservative bias” – particularly in light of our last piece where we referred to Bill Clinton and the trailer park vote. Hopefully this piece appeases you for a time. If not, you might want to refer to our October 18, 2004, post (“Bush vs. Kerry: Who We’re Voting For”) to see that we’re Libertarians!

We’ll write to you again in a few weeks. In the interim, please keep those comments coming. We love hearing from you…

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