January 19, 2018 11:40 pm CST
Why Won't Congress Help?
By Briton Ryle, Wealth Daily


Why doesn't Congress want the U.S. economy to be stronger?

When you look at what's driving U.S. economic growth — and what's holding it back — the only reasonable conclusion is that Congress wants the U.S. economy to be weak. 

Consider this chart...

corpcash

$2 trillion: That's how much cash corporate America has sitting in overseas bank accounts right now.

You know the drill: Companies that do a lot of business overseas, like Cisco (NASDAQ: CSCO) and Apple (NASDAQ: AAPL), leave their profits in foreign bank accounts because they don't want to pay income taxes on it. There is no rule requiring them to pay U.S. taxes on this money.

Of course, they do pay local taxes to Ireland or the Netherlands or wherever the money is being held. But these tax rates are usually much lower than U.S. corporate rates, which run at 35%.

At 35%, we're talking about $730 billion in tax revenue. 

Yeah, that's a ridiculous number. And so is the 35% tax rate. 

Why is it that Congress can't lower the tax rate to, say, 10% in order to get some or all of that money back into the U.S.?

At 10%, that would be $210 billion in tax revenue, which would put a nice dent in the federal government's annual spending deficit (obviously we can't say "budget" deficit because the U.S. hasn't had a budget in years).

How Did This Happen?

JFK took on corporate tax rates for offshore cash in 1961. Ronald Reagan did it, too, in the Tax Reform Act of 1986.

But then Presidents Bill Clinton and George Bush created new tax code rules that allowed companies to dodge taxes even more effectively. 

In 2006, there was around $600 billion in offshore accounts. Today, it's $2.1 trillion. 

And the thing that should really get under your skin is that "offshore" cash isn't always earned offshore. Some of it is actually earned right here in the U.S.

And this cash sometimes isn't really held in offshore accounts — some of the cash is right here in American banks. It's "offshore" only for accounting purposes. 

Consider the case of Pfizer (NYSE: PFE). 

When Pfizer was developing Viagra, it reportedly transferred the intellectual property rights for Viagra to a foreign subsidiary in Lichtenstein. Pfizer basically has to license Viagra from itself, and it pays hefty royalties to its foreign subsidiary — even on sales in the U.S.

The ultimate irony is that these foreign subsidiaries are free to deposit cash here in the U.S. In some cases, this cash is even used to buy U.S. stocks and bonds!

All profits on foreign cash — and the cash itself — appear on the companies' balance sheets as assets and are critical aspects of valuation. 

Like Apple, which reportedly has $111 billion in offshore cash. That's a critical part of its valuation. That cash represents 15% of Apple's market cap, and without it the stock wouldn't be $127 a share.

But the really interesting thing is that Apple can't use that cash for dividends or share buybacks because the money is technically offshore. Instead, Apple borrowed money via bond sales to pay dividends and buy back stock.

It clearly makes more sense for Apple to borrow at 3% to pay dividends than to bring back offshore money at 35%...

Corporations vs. Congress

In the 1950s, corporate taxes made up 33% of federal receipts. Today, it's under 10%.

I haven't seen any figures to back it up, but I think we can make a pretty good guess at who's picking up the slack: We are — the American people. 

Yeah, I get the argument that lower corporate taxes spur growth. And we see this frequently at the local and state levels, where companies will get tax breaks to bring in jobs creating offices or factories.

But I think if we had to choose between who gets a tax break — we the people or corporations — it would be a pretty easy decision. 

The idea that corporations will invest more if they have cheaper tax rates, however, is not true. Corporations have actually been increasing their spending at a pretty good clip lately. CAPEX spending hit $192 billion in the fourth quarter of 2014, a 17% increase from 2013. 

And they spent $590 billion on share buybacks in 2014, too. 

They are hiring — better than 275,000 new jobs a month for more than a year. And they are raising wages. McDonald's (NYSE: MCD), Wal-Mart (NYSE: WMT), Starbucks (NASDAQ: SBUX), and Aetna (NYSE: AET) have all raised wages recently.

The bottom line for corporations is that they have to invest to grow. If they don't, they will lose market share and profit margins to the competition.

What's Congress doing? Basically nothing. They continue to extend measures that allow and even encourage companies to keep money offshore. And they continue to stonewall any measures that might boost economic growth. The president's proposal to cut the corporate tax rate to 28% was shot down in 2012.

It's on the table again, but don't worry — Congress won't do anything. Immigration reform? Nope. New trade deals, like the Trans-Pacific Partnership? Don't hold your breath...

Jobs bill, infrastructure bill — we're not going to see any actions from Congress that might help the economy. They're happy to let corporations do the heavy lifting, and that's sad. 

Until next time,

brit's sig

Briton Ryle

 

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