Recovery on hold with profits overseas

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment that has weighed on the economy.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, what modest growth there has been has not translated into jobs.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.

Civilian employment to population 16 years or older ratio.

 

One thing that is different now then in the past was that companies like Apple, Google, and Exxon Mobile weren’t  hoarding their profits overseas (an estimated 1.9 trillion as of May 2013). All this “cash on the sidelines” could stimulate the economy and create jobs if it was just put to use.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  This is one of the highest in the world.  Since the money is taxed as soon as it is brought into the country, then there is going to be over a third less of it when it gets here.  Further eroding these mountains of cash is the debt that is taken out to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them, and borrowing is cheaper then moving the money and paying taxes.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.   In order to stimulate the growth that the United States needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to almost a trillion dollars returning to the United States.  Opponents to this may see it as only helping the rich; that there is not guarantee the companies won’t just pay lavish dividends to shareholders and boost their share price.  Some of that probably will happen, but at least those profits are being distributed, and most likely to a great deal of Americans.  With almost 2 trillion, companies will also invest some of the money in mergers and research for the future.  This is prosperity that has already been earned, it is just held back because no rationally operated company would pay a 35% tax unless it absolutely had to, they do owe that much to their shareholders. The federal government may hate the idea of letting that much money in with such a little slice going in its coffers, but how much of this cash do companies even need to bring back?

The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the profits they are currently keeping over seas.  They should also modify existing policies to make America competitive again with regard to corporate taxes.  It is only driving money away (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.  The wealth can’t trickle down through a border.