Wall Street can’t wait to get its hands on some of the $2.5 trillion that U.S. companies have stashed overseas.
Neither can Washington. In fact, a revenue-raising proposal by President-elect Donald Trump is what focused investors’ attention on the hoard of foreign cash.
Trump is proposing a one-time 10 percent tax on corporations’ accumulated foreign profits. Under current law, the money goes untaxed until a company wants to repatriate it to America, and then it’s hit with the normal corporate rate of 35 percent.
After paying the one-time tax, companies would be free to use the money however they want. Goldman Sachs estimates that companies in the Standard & Poor’s 500 index will bring home $200 billion of cash next year and use $150 billion to buy back their own shares.
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That will drive a 30 percent increase in share repurchases, Goldman predicts. Optimism about that flood of cash has helped push stock prices to record levels since the election.
Before companies can spend the money, though, Washington must agree on what to do with its cut. The 10 percent tax has been discussed as a way to fund Trump’s infrastructure plan, an idea that has bipartisan appeal.
Trump is also promising a sweeping tax reform that would cut the top corporate rate to 15 percent, which is difficult to do without blowing a huge hole in the budget. The repatriated-profits tax is one of the few big sources of money to pay for the rate reduction.
Corporate lobbyists might gladly accept a one-time tax in return for permanently lower rates, but they’d protest loudly if they were simply dunned to pay for roads and bridges.
“We believe any dollars from deemed repatriation should be used for tax reform, not spending,” says David Burton, a senior fellow at the conservative Heritage Foundation.
Much as Congress might like to, it can’t spend the same money twice. To some experts, moreover, the foreign-profits tax isn’t the best funding source for infrastructure.
“They don’t seem to want to increase the gas tax, which traditionally has been how we pay for transportation,” says Eric Toder, co-director of the Tax Policy Center. “This is using a temporary revenue source to pay for sustained funding needs.”
One thing we shouldn’t expect is any economic boost from corporations bringing their money home. That was the hope in 2004 when Congress passed a tax “holiday,” letting corporations pay a temporary 5 percent rate on money they repatriated.
The holiday was part of the American Jobs Creation Act, but the jobs were a mirage. Companies spent the cash on acquisitions, dividends and stock repurchases, and some of the biggest beneficiaries employed fewer people two years later.
The current proposal is a mandatory tax, not a voluntary holiday, but the effects should be similar.
“That money is likely to go to buybacks and mergers,” says Chuck Marr, director of federal tax policy at the liberal Center on Budget and Policy Priorities. “We shouldn’t be under any illusion that it is going to lead to some sort of uptick in investment.”
Wall Street is fine with that, but it may be getting ahead of itself in anticipating a quick infusion of cash.
The tax proposals being put forward by both Trump and congressional leaders are the most ambitious in decades, and the details are still fuzzy.
While Washington tussles over how to use its piece of the corporate-tax windfall, Wall Street will simply have to be patient.
