U.S. companies are stockpiling a record amount of foreign earned profits abroad, roughly $2.1 trillion. The amount of cash held overseas by U.S. multinationals is up 93 percent since 2008. And Uncle Sam receives a near-zero return on foreign profits held overseas. This sad state of affairs is the ultimate result of a U.S. tax code so antiquated and perverse that it undermines America’s economic competitiveness.
The way the system works, foreign earnings are subject to a 35 percent U.S. tax, but that tax may be deferred indefinitely if a corporation chooses not to repatriate. In effect, corporations are incentivized to keep their money overseas, along with the jobs and operations that come with it. Everyone loses: the government, corporations, U.S. taxpayers and anyone with a 401(k).
Republican or Democrat, nobody in Washington denies the problem exists. The disagreement lies in the remedy. On the left, some want to end the deferral and levy an across-the-board tax of 25 or 30 percent on all corporate profits earned overseas. That solution may have worked at the turn of the last century, but it won't today, when globalization has reduced the barriers that prevent a company from relocating. It would lead -- and in too many cases already has led -- to companies reincorporating abroad, a craven but fiduciarily responsible move.
On the right, there is general consensus that we should adopt a pure territorial system in which foreign profits are taxed only in the country where they are generated. Yet this would reduce tax revenues and create a race to the bottom, with companies gravitating to the places where tax rates are lowest. Meanwhile, the incentive for U.S.-based multinationals to book profits overseas will only increase, tax revenues will decline and the federal deficit will rise.
I’d be lying if I claimed to know an easy way out of this mess. What I do know is that every day the status quo persists, Americans stand to lose, and our competitiveness erodes: A 2013 report card issued by the American Society of Civil Engineers gave U.S. infrastructure a cumulative grade of D+ and pegged the investment needed to bring us up to par at $3.6 trillion. What's more, the longer we wait to deal with our corporate tax system, the harder it also becomes to solve other endemic problems our nation faces, from an income gap to an education gap and a broken immigration system.
One short-term fix that routinely gets attention is the idea of a repatriation tax holiday. Under this plan, U.S. companies would be permitted to bring back profits held overseas at a sharply reduced tax rate of about 5 percent. Although proponents argue it would provide a boost to the economy, critics rightly note that we’ve been down that road before -- in 2004 -- and the economic benefits never fully materialized.
That’s where a proposal championed by Representative John Delaney and co-sponsored by 32 House Republicans, 31 House Democrats and proportional numbers of a bipartisan Senate working group holds promise. If passed, the Partnership to Build America Act would establish a federally chartered bank that works with local governments and private enterprise to build critically needed infrastructure in transportation, energy, communication and education.
Here’s how the PPBA would work: It establishes a bank, the American Infrastructure Fund, and funds it with $50 billion in private capital by incentivizing companies to purchase 50-year, nongovernment guaranteed bonds that pay below-market 1 percent interest. That $50 billion of initial capital would be levered at a ratio of 15 to 1, creating a $750 billion privately funded investment fund that states and cities could use to attack their infrastructure needs.
The motivation for companies to purchase these bonds is where the controversy lies: Those that do so would be eligible to repatriate a proportional share of their foreign profits to the U.S. tax-free (ultimately equivalent to a 13 percent tax rate, slightly higher than the average effective tax rate that corporations pay today after credits, exemptions and deductions). This doesn’t sit well with a lot of right-minded folks for reasons that I can certainly understand: It rewards bad behavior on the part of corporate executives who were holding out for a sweet deal.
My response to the critics would be this: Executives certainly bear a strong burden to be good corporate citizens and pay their fair share of taxes, but that’s hard to do when current tax laws were designed for a pre-globalized, pre-Internet-age world. Are corporations, many of whom go to absurd extremes to reduce their tax burden, innocent? Hardly. But is the tax structure in which they are forced to operate completely irrational and incongruous to their fiduciary responsibilities? Categorically, yes.
Regardless, we are well past the stage of pointing fingers. There’s a credible opportunity at hand to transform the economy and put in place the physical infrastructure our children need to enjoy the same opportunities our parents gave us. As we enter election season and members of Congress fan out across the nation to ask for our votes, I hope they can summon the wisdom to accept compromises where compromise is needed. And if they can’t, I hope we can summon the wisdom to elect leaders who can.
(Ted Leonsis is a co-founder of Revolution Growth and the founder and chairman of Monumental Sports & Entertainment.)
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