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Tim Cook's pitch for a corporate tax holiday suits Washington just fine Tim Cook's pitch for a corporate tax holiday suits Washington just fine
(4 months later)
One of the strangely charming aspects of the CEO class in America (and one they share with most of Congress) is their ability to tune out the actually pressing issues of the day – the weakening American labor force, the troublesome cycle of consumer debt, the flagging pace of economic growth – and, instead, focus with laser precision on hyping the kind of issues that the rest of us might call first-world problems.One of the strangely charming aspects of the CEO class in America (and one they share with most of Congress) is their ability to tune out the actually pressing issues of the day – the weakening American labor force, the troublesome cycle of consumer debt, the flagging pace of economic growth – and, instead, focus with laser precision on hyping the kind of issues that the rest of us might call first-world problems.
So it's no surprise that government and corporations, finding their methods aligned, may also find their interests aligned. They might gear up to work together again – as soon as next week, in fact.So it's no surprise that government and corporations, finding their methods aligned, may also find their interests aligned. They might gear up to work together again – as soon as next week, in fact.
Tim Cook, the CEO of Apple, is a perfect example. It's easy to imagine that Cook wouldn't have a free moment, and that he'd be busy at home in Cupertino, California, with a litany of troubles: the fears that Apple's glory is over; that innovation isn't on schedule; that major shareholders are selling out; and the persistent downward misery of the company's stock price, which has plummeted nearly 40% over the past nine months.Tim Cook, the CEO of Apple, is a perfect example. It's easy to imagine that Cook wouldn't have a free moment, and that he'd be busy at home in Cupertino, California, with a litany of troubles: the fears that Apple's glory is over; that innovation isn't on schedule; that major shareholders are selling out; and the persistent downward misery of the company's stock price, which has plummeted nearly 40% over the past nine months.
But Cook has liberated himself from these chains and turned his attention to what he and most of Corporate America think is a more pressing problem: a tax holiday. The issue is simple: how to ensure that companies can avoid paying US taxes on money they make overseas. The notion has come into vogue several times over the past few years, but has failed to breach public opinion each time.But Cook has liberated himself from these chains and turned his attention to what he and most of Corporate America think is a more pressing problem: a tax holiday. The issue is simple: how to ensure that companies can avoid paying US taxes on money they make overseas. The notion has come into vogue several times over the past few years, but has failed to breach public opinion each time.
Cook will be making the rounds of Washington next week to push it again. He already gave an interview to the Washington Post advocating that the current 35% tax rate on overseas profits is too burdensome for American companies.Cook will be making the rounds of Washington next week to push it again. He already gave an interview to the Washington Post advocating that the current 35% tax rate on overseas profits is too burdensome for American companies.
About $1.7tn of US corporate dollars are sitting overseas, and those companies say they would love to bring it back to the United States. But what they would do with it?About $1.7tn of US corporate dollars are sitting overseas, and those companies say they would love to bring it back to the United States. But what they would do with it?
They say they would invest it in the American economy. A New America Foundation study (pdf), co-written by Laura D'Andrea Tyson,
maintained that companies could use the money for two purposes:		They say they would invest it in the American economy. A New America Foundation study (pdf), co-written by Laura D'Andrea Tyson,
maintained that companies could use the money for two purposes:
"They can distribute them to their shareholders in the form of dividend payments and share repurchases; and they can use them directly to fund their domestic economic activities or to reduce their debt.""They can distribute them to their shareholders in the form of dividend payments and share repurchases; and they can use them directly to fund their domestic economic activities or to reduce their debt."
The paper estimated that $581bn in repatriated cash would go to to US shareholders, of which $192bn will go to US households. With the struggling US consumer and 12 million people unemployed, that sounds like a nice boost for the economy. Appealing, right? Companies could spread the wealth, either giving it to stockholders or pumping it into the economy – wouldn't that be a nice change from what we hear about the unevenness of the economy, and companies hoarding cash while households struggle?The paper estimated that $581bn in repatriated cash would go to to US shareholders, of which $192bn will go to US households. With the struggling US consumer and 12 million people unemployed, that sounds like a nice boost for the economy. Appealing, right? Companies could spread the wealth, either giving it to stockholders or pumping it into the economy – wouldn't that be a nice change from what we hear about the unevenness of the economy, and companies hoarding cash while households struggle?
Unfortunately, it's more like wealth redistribution for corporate dummies. History shows us that these promises are not to be trusted.Unfortunately, it's more like wealth redistribution for corporate dummies. History shows us that these promises are not to be trusted.
Companies had a tax holiday once before, in 2004, when a set of major corporations were allowed to bring back their overseas profits at a tax rate of only 5.25%. You might imagine that it resulted in an enormous economic boost, but here's what happened instead, in the words of Treasury official Michael Mundaca:Companies had a tax holiday once before, in 2004, when a set of major corporations were allowed to bring back their overseas profits at a tax rate of only 5.25%. You might imagine that it resulted in an enormous economic boost, but here's what happened instead, in the words of Treasury official Michael Mundaca:
"There is no evidence that it increased US investment or jobs, and it cost taxpayers billions … the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.""There is no evidence that it increased US investment or jobs, and it cost taxpayers billions … the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends."
So we tried a tax holiday before, it accomplished nothing except lining some corporate coffers, and it hurt the economy. It actually gave a kind of moral permission for companies to cut jobs, even when the economy was booming.So we tried a tax holiday before, it accomplished nothing except lining some corporate coffers, and it hurt the economy. It actually gave a kind of moral permission for companies to cut jobs, even when the economy was booming.
Every investment banker and CEO with any honesty will admit that the 2004 tax holiday didn't perform as promised. Still, they will insist that time will be different. Why?Every investment banker and CEO with any honesty will admit that the 2004 tax holiday didn't perform as promised. Still, they will insist that time will be different. Why?
Politicians know the government has absolutely no leverage after it grants the holiday. It can lower the tax rate, but it loses any say over how companies use the money they get back. The government, which rarely drives a hard bargain with Corporate America, would be even less likely to be a tough negotiator after handing companies a giant financial gift.Politicians know the government has absolutely no leverage after it grants the holiday. It can lower the tax rate, but it loses any say over how companies use the money they get back. The government, which rarely drives a hard bargain with Corporate America, would be even less likely to be a tough negotiator after handing companies a giant financial gift.
Which is too bad, because, as the sequester shows us, the government could do with an influx of cash. It's easy to see why companies would like a tax holiday, but the government would like one, too: it could use the revenue. $1.7tn at a 35% tax rate would bring in no money, because no company would bring it back, but $1.7tn at, say, a 5% tax rate would put some money in Washington's coffers.Which is too bad, because, as the sequester shows us, the government could do with an influx of cash. It's easy to see why companies would like a tax holiday, but the government would like one, too: it could use the revenue. $1.7tn at a 35% tax rate would bring in no money, because no company would bring it back, but $1.7tn at, say, a 5% tax rate would put some money in Washington's coffers.
Perhaps Tim Cook is not going to Washington to argue for Corporate America so much as to cover for the politicians who want to pad the meager federal budget.Perhaps Tim Cook is not going to Washington to argue for Corporate America so much as to cover for the politicians who want to pad the meager federal budget.
One solution to DC's dilemma might be to attach some strings. In Washington, there have been discussions that perhaps companies should be allowed a tax holiday – if the money can be earmarked for some major project, like infrastructure, which is suffering from funding issues and could need as much as $3.6 trillion to be fixed. A tax holiday could provide the funds for that just that fix.One solution to DC's dilemma might be to attach some strings. In Washington, there have been discussions that perhaps companies should be allowed a tax holiday – if the money can be earmarked for some major project, like infrastructure, which is suffering from funding issues and could need as much as $3.6 trillion to be fixed. A tax holiday could provide the funds for that just that fix.
Just a few weeks ago, Representative John K Delaney proposed an infrastructure bill that would offer US companies a tax holiday if they used some of the money to buy infrastructure bonds. Rep Delaney proposed, for example, that companies might get a tax break of $4 for every $1 they buy in infrastructure bonds, which would make for a tax rate of roughly 8%.Just a few weeks ago, Representative John K Delaney proposed an infrastructure bill that would offer US companies a tax holiday if they used some of the money to buy infrastructure bonds. Rep Delaney proposed, for example, that companies might get a tax break of $4 for every $1 they buy in infrastructure bonds, which would make for a tax rate of roughly 8%.
That money would actually help the economy. Bond sales have been helpful for infrastructure; the Build America Bonds program, for instance, made it easier for many municipalities to borrow money, because it made many buyers willing to lend in return for a 35% tax break on the bonds.That money would actually help the economy. Bond sales have been helpful for infrastructure; the Build America Bonds program, for instance, made it easier for many municipalities to borrow money, because it made many buyers willing to lend in return for a 35% tax break on the bonds.
It turns out, then, that what Corporate America wants is also what the government wants. It just may not be what Americans want; it's hard to root for companies to get richer, considering that all the money they've been making has not helped employ many more people. As such, there's a possibility that the hearings next week will bridge the perception gap, letting Washington say that Cook persuaded that the tax holiday was a good idea.It turns out, then, that what Corporate America wants is also what the government wants. It just may not be what Americans want; it's hard to root for companies to get richer, considering that all the money they've been making has not helped employ many more people. As such, there's a possibility that the hearings next week will bridge the perception gap, letting Washington say that Cook persuaded that the tax holiday was a good idea.
Cook is one of President Obama's favorite executives; in fact, he may be the only executive the president likes these days. So it's no surprise that he's the only one going to Washington to testify on behalf of the tax holiday. Just don't believe that it's really his idea alone.Cook is one of President Obama's favorite executives; in fact, he may be the only executive the president likes these days. So it's no surprise that he's the only one going to Washington to testify on behalf of the tax holiday. Just don't believe that it's really his idea alone.
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