Would a Corporate Tax Holiday Help the Economy?

With the news that Apple (NAS: AAPL) has finally announced a cash dividend and stock buyback came a recurrence of the plea for corporate tax relief. This "repatriation holiday," as the corporate wonks put it, is something like when your local library forgives fines for a day, prompting the return of boatloads of overdue material. With taxes reduced to almost nothing, billions of dollars would flow back into the U.S. to help float the economic boat. Well, in theory, anyway.

Prohibitive tax rate
The amounts of money in question are staggering: an estimated $1.24 trillion is held in overseas accounts by U.S. corporations, according to Moody's. For Apple, fully two-thirds of its nearly $100 billion in cash is held outside the United States. Other big companies, such as Microsoft (NAS: MSFT) and Cisco (NAS: CSCO) , each have nearly 90% of their income held offshore, while Oracle (NAS: ORCL) has a stash equal to 75% of its wealth overseas, and Google (NAS: GOOG) holds a hefty 48% in overseas accounts. A Cisco representative stated that the company has less cash on hand here since this country is where it spends the most. The biggest issue, however, is the loss Cisco would incur if it were to bring that money home.

These heavy hitters are not the only companies with hoards of money outside the United States. A total of 70 corporations contribute to the total, with big names including General Electric, Pfizer, Johnson & Johnson, and Intel among those rounding out the top 10. But while the heads of companies such as Oracle and Cisco have purported that bringing money into this country with a tax holiday could be used for investment in new jobs, research and development, and expansion here at home, history shows that this would probably not be the case.

Apple, Google, Microsoft and Cisco have been the leaders in the charge to coax Congress for a rerun of the 2004 tax holiday, whereby the tax was lowered to 5.25% from 35% and a total of $312 billion in overseas profits entered the U.S. for the first time. Even though scores of lobbyists are working on this problem, no new tax break has materialized. That could be because, despite the corporations' assertions that the funds would help boost the economy, the money was used to pay dividends and buy back stock. Not a bad thing, but not exactly the argument that the lawmakers who have been pushing the tax break have been using in its defense. In a recent interview, Sen. Kay Hagan (D-N.C.) said the holiday would allow companies to "put $1 trillion of foreign earnings back to work in the U.S. economy." Since some of the 800 corporate participants of the last repatriation day have laid off employees, that argument loses some of its persuasiveness.

Would it really help?
Certainly, all these companies have ample funds here in the U.S. that they could use to help with economic expansion and unemployment, if they chose to. They can also institute share repurchases and dividend payments, as Apple just did, or even raise their dividend payments. Despite the high percentage of wealth held overseas, for example, Microsoft and Cisco both have about $6 billion and $5 billion on hand, respectively, to finance any domestic plans they may want to implement. Cisco, meanwhile, found the means to use nearly $7 billion in 2010 to buy back stock.

Both Microsoft and Google have denied that they have the need or the will to repatriate offshore funds. While simultaneously lobbying Congress for a tax break, Google stated in Q3 SEC documents that it planned to use the cash on hand to fund business needs here, and to use the overseas money for offshore investments. Microsoft's filing for the same quarter was similar, with the company stating that there was no need to bring home the cash currently residing outside the U.S. and that its domestic stash would be enough to see the company through.

Investors are learning to flex their collective muscles
While a tax repatriation day would probably behoove investors, and particularly corporate CEOs, it doesn't seem as if the economy as a whole would see any benefit. Since the program would cost U.S. taxpayers upwards of $80 billion -- and there would be no way to dictate to companies how they would have to use the repatriated funds anyway -- it might actually harm an economy just sputtering to life.

There's a valuable lesson from this whole affair, however: Investors have the power to pressure companies to share the pie, regardless of where the cash pile sits. Pleasing investors is, after all, what public companies are supposed to do. Sometimes, all they need is a little nudge to get them moving -- and that's something that investors can take to the bank.

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At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Cisco Systems, Microsoft, Oracle, Google, Intel, Johnson & Johnson, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, Pfizer, Johnson & Johnson, Intel, Moody's, and Apple, creating a diagonal call position in Johnson & Johnson, and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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I don't know why our government won't allow the companies to bring money back into the country totally free of cooperate tax......with the stipulation that all such money be required to be paid out in dividends. The money comes home, the dividends are taxable income to the individuals. TAXABLE MONEY ADDED TO OUR ECONOMY. Am I missing something here?

April 01 2012 at 9:50 AM Report abuse rate up rate down Reply