Let’s be optimistic and assume Congress wants to do something to assist the economy, rather than sitting back watching the stock market lurch like a drunk trying to make it down a steep staircase. If Congress really wants to help, Maryland U.S. Sen. Ben Cardin has an idea that ought to get serious attention.
In the current climate, the president and Congress will have to come up with ways to stimulate the economy and create jobs without raising taxes or boosting spending. So how about a temporary, targeted tax cut?
Right now American companies are sitting on a mind-boggling pile of cash, unwilling to spend it because they are uncertain about government regulation and don’t see any consumer demand.
JPMorgan Chase estimated in May that 519 American multinationals hold nearly $1.4 trillion outside the United States. In part, this is because the United States, unlike most other developed nations, imposes very high taxes – up to 35 percent – when foreign earnings are brought home.
So the idea of a tax holiday is gaining traction in Congress. Cardin’s version: temporarily cut the tax to 9.5 percent for cash moved back to the United States, then shunt the estimated $20 billion to $30 billion in revenue into a national infrastructure bank, to renovate schools, build roads and create jobs.
That way, there would be a direct benefit even if the companies respond the same way they did to the American Jobs Creation Act, the repatriation tax holiday Congress passed in 2004. Repatriations jumped by some $230 billion in one year, but the bulk of the money was used to pay dividends or buy back shares – an economic stimulus, but not of the sort Congress intended.
American multinationals can think of lots of ways to use offshore cash abroad. They can buy foreign companies. They can hire and invest – in Asia and Latin America, where consumer demand is booming, as millions gain middle-class incomes and start buying middle-class amenities.
While it’s nice to think that American companies will be spreading prosperity around the world, we could use some of that money at home. Cardin’s proposal would be a good short-term way to get it here.
In the long run, we need more than tax holidays, which have the perverse effect of encouraging companies to keep their cash abroad while awaiting the next one. We need a tax system with more consistency and fewer loopholes; we need a business climate in which entrepreneurs are confident their investments won’t fall victim to the whim of politicians.
Speaking of American companies, Cardin said, “You give them predictability, they’ll take off.” We think he’s right.