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A potential negative side effect of the “fiscal-cliffitis” epidemic is that we’ll all be so relieved when it’s over we might not have the psychic energy to focus on the other tax issues needing attention. One of them is the cash stash that U.S. corporations have overseas and aren’t bringing home — where the money could be invested in jobs-creating growth — because of the tax hit. According to a recent Wall Street Journal article, roughly 60% of the cash that big corporations have on their balance sheets is banked overseas, where it was earned. These companies already have paid the local taxes and don’t want to shell out an additional 35% by transferring it back to the United States. The article details some amazing statistics, which are coming to light because the Securities and Exchange Commission has been pressing companies for details. For example: “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.” Reporter Kate Linebaugh writes there is wide agreement the corporate tax structure needs reform but — surprise, surprise — “lawmakers and businesses disagree on a fix.” Corporations want to pay taxes only where profits are earned. “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.” There are two issues here. One is whether the federal government should tax overseas profits at all. The United States is in the minority of countries to do so. Of course, the government would love the revenue, but it doesn’t collect any if companies keep the cash out of the country. This is one of those questions that nobody wants to tackle unless forced to. The other issue is that we can use that cash now to bolster the feeble economic recovery and to set the stage for boosting growth to 4% annually. So, how about this plan: Enact a one-year tax holiday on overseas cash that is used for business investment within the United States — not paying dividends or buying back shares or making acquisitions, but growing output. In exchange, put corporate tax reform on the docket in Congress with a deadline for an up-or-down vote. “Fiscal-cliffism” may be phony and arbitrary, as some pundits complain, but at least it has Washington doing something constructive that wasn’t happening before. Could it be a tactic whose time has come?
2012 Economic Growth Fellow
John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.Full Bio