You may recall that we discussed briefly the fact that companies are reportedly sitting on several trillion dollars in profits being held by overseas subsidiaries. That money could easily be put to use back here to reinvest in new projects, new production and growth. So, why is it sitting over in other countries? First we should look at how it got there in the first place, at least at a few reasons.
Companies spend a LOT of money researching, developing and then building new products and services to sell here in the United States. These products go through what's known as the product life cycle, until, finally it is obsolete. Well, HERE it's obsolete. Oftimes overseas what we consider to be last year's hit is tomorrows next best thing. So, goods are shipped overseas and sold.
Other companies, such as McDonald's, Wal-Mart, Kentucky Fried Chicken and countless others have established a world-wide branding that allows them to sell their businesses in countries around the world.
So, now the company is making money overseas. This money stays there until re-patriated into the US. A number of countries, ours included taxes revenues from overseas when it is re-patriated. The difference is that the US taxes that income at 35%. Most other developed nations tax this revenue at a much lower rate, averaging slightly less than 20%. So, the company is faced with a decision. Does it bring that money home and reinvest in the United States or does it reinvest those funds in the other country? The challenge in bringing that money home is that it has to have a return sufficient to make up for the higher tax rate paid. It's profit motivation pure and simple.
We could encourage companies to invest in domestic spending and job growth by doing one simple thing: Lowering our tax rate on repatriated revenues to the international average or below. The money comes home then gets spent building new facilities, hiring new workers, or paying dividends. Those dividends are then either reinvested or spent.
Here's an interesting thought. If $1 trillion dollars is repatriated at 35% tax rate, then the remaining $650 billion is paid out just in dividends, which the government will tax at a rate between 5 and 15%. The average is actually closer to 12%. That's $78 billion additional dollars spent on taxes. Essentially that 35% tax rate just went up to 42.8%. If that money was spent on wages then it could go even higher. With our current policies that money is staying out of the US Economy. Other countries will continue to reap the benefits of our heavy handed tax policies and our economy will continue to limp along in this "recovery."