Diary

Foreign Corporate Profits and Repatriation- The Solution

This writer is a fan of the governmental quid pro quo and allow me to show three examples where it works.  It also provides a key to the dilemma of encouraging corporations to repatriate foreign profits.  In France in order to meet the need for general practitioners, the government pays 100% of a person’s medical school training.  In exchange, that person must practice in an under-served area for a specific amount of time.  Their income during that time is guaranteed at $55,000 US, which is considerably below what any doctor (especially a specialist) could make in a year.  However, for that lower stipend, they are exempt from France’s exorbitant payroll taxes.  The medical school graduate receives a free education and is debt free upon licensing as a doctor while receiving a minimal salary every year essentially tax free.  The entire system is voluntary.  A French medical student is not obligated to participate in the program, but many do.  There is no disincentive to medical specialization in France, but definitely an incentive for general practice because of the need.  It is a win for the French medical graduate (no debt) and for the country (more general practitioners in needed areas).

One domestic example are TEACH grants.  In this program, eligible applicants can receive up to $4,000 in grants to enter the teaching profession.  Within eight years of graduation from an accredited teacher education program, the graduate must do one of two things: (1) either teach in a high need subject specialty and/or (2) teach in a school district with a high percentage of low income students.  This program is again a win-win situation for the teacher (they have a considerable amount of college debt reduced) while addressing the need for science and math teachers, or any teacher in a low-income district, or even ESL teachers where there is a need.

Another domestic program is the military’s ROTC program.  In exchange for a promise of a specified period of military enrollment, college tuition is largely paid, often with a stipend.  Upon successful graduation, the student exits college largely debt free in exchange for military service as an officer.  Along the way, they enjoy many advantages of the military- pay, further job training, health benefits, housing and travel to name some, besides the invaluable experience military service entails.  Again, it is a win-win situation- the needs of the military are met while the needs of the college graduate are met (mainly, a debt free life).

In all these examples, they are contractual relationships with consequences should the person not live up to their responsibilities.  With the TEACH grants, the graduate must teach for four years within eight years of graduation in one of those areas (low-income district or high-need specialty) lest the grant revert to a loan with interest.  An ROTC graduate would lose benefits if they are dishonorably discharged or fail to meet their obligations.  French general practitioners who fail to serve in needed areas are penalized through the tax system for breaking the contract.

These examples serve as possible templates for the repatriation of foreign corporate profits.  In exchange for that repatriation at a tax rate considerably below the current rates, the corporation must agree to certain criteria.  This would go hand-in-hand with an overall lowering of the corporate tax rate to bring it more in line with international standards among developed countries.  This would put the brakes on future offshoring of profits (although it would still likely exist albeit at a reduced rate; there will always be tax free havens like Bermuda).  But, it does nothing to address the current estimated $2 trillion in corporate profits parked offshore.

To hear corporate America and organizations like the Chamber of Commerce talk, they would like nothing more than to repatriate those profits and invest domestically but for the onerous corporate tax rates.  Let’s force them to put that money where their collective mouths are.  In exchange for repatriating foreign profits, it would be taxed at a flat rate of 6% which is quite competitive.  For example, assuming all foreign profits were repatriated and taxed at 6%, consider the following:

  • General Electric has $110 billion offshore; at 6% the Treasury would get $6.6 billion
  • Microsoft has $76.4 billion offshore; the Treasury would get over $4.5 billion
  • Pfizer has $69 billion offshore; the Treasury gets over $4.1 billion
  • Merck has $57.1 billion offshore; the Treasury gets over $3.4 billion
  • Apple has $54.4 billion offshore; the Treasury gets over $3.2 billion

And these are only the five largest companies with reported offshore profits.  The Treasury gets at least $21 billion in revenue that they currently are not getting and that is considerably more than nothing.

But, what about, for example in the case of GE, the greater than $100 billion in profit left after taxes?  That is where the quid pro quo enters the discussion.  We have already lured billions of dollars back to the United States and Uncle Sam has taken his cut without being greedy.  In exchange for that favorable set of circumstances for the corporation, they must agree contractually to a certain set of conditions that could be negotiated on a case-by-case basis, or even broad parameters set.  For example, a certain percentage must be dedicated to job production or capital improvement or whatever.  They could still use some of that profit for stock buybacks or increased shareholder dividends provided they are doing what repatriation of those profits is intended to do: increase wages, provide jobs, and invest in domestic operations.

In a simple example, let’s assume the residual profit after taxes in the case of GE- about $100 billion- is evenly divided between increasing existing salaries, hiring more employees, capital improvement of domestic operations, and shareholder payouts. That translates into $25 billion in increased wages, $25 billion worth of new jobs, $25 billion of capital improvements (which creates more jobs indirectly), and $25 billion for stockholders.  In exchange, the nation gets a $100 billion privately funded stimulus from GE alone AND $6.6 billion in unrealized tax revenue.  All of this would be contractually enforced with assurances of accountability (corporate lawyers and accountants are slick) and penalties for a corporation failing to abide by its obligations under the contract.

This is a win (the government)- win (employees)-win (job seekers)-win (shareholders)-win (the corporation) situation all the way around.  The corporations would still be free to buy foreign corporations and invest abroad, but there would be considerably more favorable conditions to do so here.  If nothing else, it would force corporations to more closely question foreign investment and offshoring although one suspects it would still exist, but at a lesser rate.  Why not simultaneously eliminate the incentive and the excuse to do so?  Imagine what that unrealized windfall for the Treasury could fund.  Imagine, assuming they live up to their contractual obligations, the number of jobs directly and indirectly created.  Imagine the payoffs to stockholders in the form of higher dividends.  Imagine fewer and fewer companies investing offshore and imagine how the more favorable tax rates would lure foreign investors to the United States.  The average worker does not care if they are employed by an Irish company or an American company.  A job is a job and a paycheck.