The Homa Files

Ken’s Take: Two proven ideas have gotten little (i.e. no) visible discussion as part of the current grab-bag stimulus plan: (1) investment tax credits that reliably get businesses to step-up and accelerate capital spending plans, and (2) low tax repatriation of foreign earnings.  Most US multi-nationals park sizable cash stashes in foreign subsidiaries to legally avoid high US corporate income tax rates.  If that money were brought back on-shore, it would certainly provide some impetus to the slow economy.

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Excerpted from WSJ, “A $545 Billion Private Stimulus Plan”, Sinai, Jan. 28, 2009

The Obama team should implement a private-sector funded stimulus and allow a temporary reduction in the 35% tax rate that U.S. companies pay to repatriate foreign subsidiary earnings. Doing so could inject more than $545 billion into the U.S. economy without expanding the deficit.

Driven by previously strong foreign economies and a low dollar, the foreign subsidiaries of many successful U.S.-based companies have generated substantial earnings that could be invested in the U.S. economy at virtually no cost to the federal government. These earnings reside overseas, however, because of U.S. tax laws that many foreign competitors do not face.

Under the current system, U.S. corporations are charged 35 cents for each foreign-earned dollar they bring back home to the U.S. If they keep that income overseas, it is taxed at lower rates. As a result, those dollars tend to stay overseas permanently, since companies know they will automatically lose more money by bringing that income home than they can reasonably expect to make by reinvesting it once it is here.

In 2004, the American Jobs Creation Act incentivized U.S. businesses to bring $360 billion of foreign subsidiary earnings back into the U.S. at a reduced corporate tax rate of 5.25% for one year. On average, 25% of those funds went for capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction.

A similar opportunity exists now … lowering the tax on repatriating foreign-earned income would inject $545 billion into our economy.

A private-sector stimulus could be a win-win for government.

Full article:
http://online.wsj.com/article/SB123310439653922291.html 

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This entry was posted on January 29, 2009 at 8:00 am and is filed under Financial Crisis, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.