Linking repatriation to job creation

Household words, an expression coined by William Shakespeare, are those familiar to everyone and it seems “tax repatriation” has now joined the club. That is mainly because the president and House GOP members have trumpeted an idea to incentivize multinationals to bring home some $2.5 trillion in cash they have stashed offshore, and their CEOs have enthusiastically joined the chorus.

The Trump plan would lower the regular corporate tax rate from 35 percent to 15 percent and also “deem” all offshore corporate profits to be repatriated and subject to a preferred one-time 10 percent tax. The House Ways and Means Tax Reform Task Force favors a higher 20 percent corporate tax rate and a slightly lower 8.75 percent deemed repatriation tax.

Neither plan would dictate how the repatriated funds can or should be used back home. Perhaps because a December CNBC Global CFO Council survey reports corporate CFOs would strenuously object to the government mandating how the repatriated cash is spent and would be particularly antagonistic to any prohibition against dividends or stock buybacks.

{mosads}Parlaying a reduced corporate tax rate with an incentivized liberation of so-called trapped offshore funds is sound tax policy. Not all these massive stockpiles are sitting idle: They are building shareholder wealth with more offshore plants and R&D facilities, serving both international and U.S. markets. “Shovel-ready” projects, as the politicians and pundits like to say, but of course not on the home court.

When these corporations are not building, they’re buying—foreign companies and foreign jobs—and paying hefty premiums for their sometimes-unwise purchases. Hewlett-Packard pounced on the British-based software company Autonomy and paid a tidy $11.1 billion, only to quickly write-off $8.8 billion. Microsoft shelled out $8.5 billion for the internet voice and video business of Luxembourg-based Skype. Google announced in 2014 it planned on spending $30 billion on foreign acquisitions to help deplete its offshore pile.

For those multinationals not interested in foreign investments or acquisitions, tapping into these trapped offshore funds is ridiculously simple, not to mention tax effective. Apple has borrowed $90 billion against its $221 billion offshore stash to partially fund a $250 billion multiyear shareholder capital return program and tax deducting the interest costs along the way.

A lower corporate tax rate going forward will surely slow down this expatriation of corporate assets and shareholder wealth, not to mention the popular wave of corporate inversions. But since jobs, jobs, jobs is the Trump and GOP mantra, why not link the one-off repatriation tax break to the creation of new gigs? The conventional retort is that Bush 43 tried that approach in 2004 and it was a bust.

Indeed it was a failed experiment, but only because the legislation was poorly conceived and loosely drafted. It allowed companies to funnel home $362 billion in cash virtually unchecked at a minimal tax cost of 5 percent. Ninety-two percent of the repatriated funds were returned to shareholders as dividends and buybacks, and some electing companies actually shuttered U.S. plants and slashed payrolls.

In contrast to the Bush program, which conveniently overlooked that money is fungible and chose to rely on squishy corporate promises, why not put into place a plan that follows President Reagan’s timeless motto, “trust but verify”?

Here’s the concept: For every $10 million repatriated, an electing company will sign on to create a finite number of jobs in the U.S. during a two year window. Failure to meet the job creation commitment for any $10 million repatriation slice would kick up the tax rate to the new regular corporate rate (i.e., Trump: 15 percent or GOP: 20 percent).

Job creation is not without cost, and economist estimates to generate one new job range widely depending on geography, demography, skills and other assumptions: an average of $100,000 per gig seems an appropriate benchmark. So how many jobs should a company be required to create for each $10 million repatriated?

The math is simple: $10 million divided by $100,000 equals 100 jobs. Voilà!

Importantly, the concept would be fashioned as a “net” job creation proposition, so if layoffs also occur during the designated 24-month time frame this would count negatively.

The Trump and GOP proposals differ on the tax rate for deemed repatriations (10 percent vs. 8.5 percent) but there are no job creation strings attached to either. This can only mean we are looking at a rerun of the dismal 2004 Bush repatriation experience, confirmed by the recent CNBC Global CFO Council survey where only 13 percent of those polled said their companies would increase headcount with the repatriated funds.

So let’s give companies a choice. Those making the election and subsequently verifying the job creation requirements would be given a generous preferential tax rate of 5 percent. Those not participating would pay the higher regular corporate rate (Trump: 15 percent or GOP: 20 percent). This dichotomy should provide a powerful incentive for companies to opt into the job creation program with total flexibility as to the level of commitment.

This idea is not completely without precedent. Sens. John McCain (R-Ariz.) and Kay Hagan (D-N.C.) introduced legislation in 2011 that would have permitted companies to make a repatriation election and reduce the 35 percent corporate rate to 8.75 percent with no job creation conditions and to 5.25 percent if company payroll was increased by 10 percent. While the proposed legislation was conceptually sound, the 3.5 percent incremental tax incentive for job electors was way too modest to be attractive, particularly when coupled with the far too rigid all or nothing mandated 10 percent payroll hike. The bill also was vulnerable as piecemeal legislation unaccompanied by overall corporate tax reform. It languished in committee.

Job creation is President Trump’s singular call, and his vision is for a dynamic economy that will create 25 million new jobs over the next decade. He proposes to boost growth on average to at least 3.5 percent annually and says this will be accomplished by reform policies that include a pro-growth tax plan. An early incentive-driven tax repatriation program linked directly and verifiably to new jobs could prove to be a powerful kickstart to achieving the president’s vision, and might even attract bipartisan political support.

John Klotsche is a retired tax partner and former chairman of the Executive Committee of the international law firm Baker McKenzie. He served as senior adviser to the IRS commissioner from 2003 to 2008.

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