Microsoft and other high-tech companies are asking the US government for a year-long tax repatriation holiday that would allow them to transfer billions of dollars of cash from international banks into the United States at a much-lower-than-usual tax rate. And this temporary holiday wouldn't just benefit the companies in question: By moving that much cash back into the United States, they could inject trillions of dollars, collectively, into the ailing US economy.
Maybe.
Microsoft currently holds $29 billion in cash offshore in various banks (and it will draw from these funds to purchase Luxembourg-based Skype for $8.5 billion). Apple and Google, which are also petitioning the government for the tax holiday, hold $12 billion and $17 billion, respectively, in overseas accounts. Numerous corporations in various industries are also petitioning for the change.
Under US law, corporate profits returned to the United States from overseas are taxed at a whopping 35 percent. But the companies are asking the government for a one-year repatriation holiday in which the rate for such transfers would temporarily drop to 5.25 percent.
The holiday would generate tens of billions of dollars in tax revenues at the lower rate. And the tax break could also be seen as a corporate economic stimulus of sorts, with over $1 trillion being injected into the US economy over the next year.
"For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly," Duke Energy CEO Jim Rogers said during a Washington D.C. conference last week that discussed the tax holiday. (This was originally reported by The New York Times.)
So is the tax holiday a win-win? Maybe not. This scheme was tried once in the past, in 2005, when a similar tax break returned $312 billion to the United States. But 92 percent of the cash was returned to corporate shareholders and didn't directly impact the US economy in any meaningful way; and just $16 billion in tax revenues was collected at the time. A study of the holiday noted that it "did not increase domestic investment, employment, or research and development." Many of the bigger companies that took advantage of the tax break—especially giant pharmaceutical firms—actually laid off employees and cut capital spending in the United States for years afterward in a bid to trigger further breaks.
To avoid repeating this debacle, the US Congress could require companies that take advantage of a temporary tax break to companies that hire and invest in US-based infrastructure. Not that it matters, perhaps. So far, the Obama administration has been overly critical of the proposal, and many activist groups are already complaining about companies like Apple deriving huge profits from overseas holdings with questionable human rights agendas.
