Saturday, February 6, 2010

Job Creation Proposal #4: Jobs Tax Credit Funded by Foreign Earnings Repatriation Tax

Presently, US multinational corps have more than $1.1 trillion of unremitted foreign earnings of their foreign subsidiaries, a very significant part of it earned in International Tax Havens like Ireland, Puerto Rico, Singapore, the Netherlands, China, and many more low-taxed places.

Further, these aggregate unremitted foreign earnings increased by 16.4% in the most recent year, in a year marred in a deep recession. When I do the mathematics using this 16.4% annual growth, if nothing changes, these $1.1 trillion of unremitted foreign earnings will grow to more than $3.2 trillion at the end of President Obama's second presidential term. It is pretty clear that something must be done to solve this huge problem.

Pundits keep talking about how small businesses create all the US jobs. Well, large US multinational corps create jobs too, it’s just that they are outside the country, mostly in countries with very favorable income tax incentives.

One of the areas where I think the economists in the Obama Administration have really been off target in their failed attempt at improving the dismal US job picture is in their myopic focus on small businesses. They continue to overlook the effectiveness of tax incentives to get large US multinational corps to invest in US capital expenditures and to create jobs in the US. One key area of small and medium-sized US businesses growth is that they can feed off of an economic expansion of large businesses in the US.

Of this massive $1.1 trillion of these foreign earnings parked overseas, 24% of these foreign earnings are of pure Drug and Medical US multinational corps and another 20% are of pure high technology US multinational corps.

To exhibit just how important international tax planning is to these two industries, three of the top five companies with the highest unremitted foreign earnings at Dec 31, 2008 were Big Pharma companies. Here at the unremitted foreign earnings numbers above $10 bil for Big Pharma companies at the end of 2008 :

Pfizer/Wyeth........................$76 bil
Merck/Schering-Plough........$30 bil
JNJ........................................$28 bil
Bristol Myers Squibb.............$15 bil
Abbott Labs...........................$15 bil
Eli Lilly...................................$13 bil
Amgen....................................$11 bil

And then here are the pure high tech companies with unremitted foreign earnings at the end of their most recent audited financial statements:

Cisco Systems........................$24 bil
IBM........................................$22 bil
Microsoft................................$18 bil
Hewlett-Packard.....................$17 bil
Oracle......................................$14 bil

And the unremitted foreign earnings numbers of high tech companies have recently been growing like weeds. For instance, Microsoft's unremitted foreign earnings number grew by $11 bil in just the past year. Now that is what I call an income shift.

That is why these two industries, and other huge multinational corps, lobby the US Congress so hard for the 85% Dividend Received Deduction when foreign earnings are repatriated.

Incredibly, these multinational corps were successful in 2004 during the previous Administration in getting this coveted 85% Dividend Received Deduction passed on a temporary basis.

The current Obama Administration is clearly aware of this US Big Multinational Corp boondoggle here and so far has shown that it will have no part of this 85% Dividend Received Deduction strategy.

Many of these multinational corps would love to get their foreign earnings repatriated to the US, along with the related cash and investments, which are parked overseas.

The major problem here is that to get these foreign earnings repatriated, the present US income tax consequences to US multinational corps are very expensive, because the grossed up dividend, related to the foreign earnings repatriated, is taxed in the US at a pretty stiff effective federal income tax rate.

This proposal puts in some fair and measured tax incentives to make this foreign earnings repatriation much more economically attractive to US multinational corps. And it is a three-fer, because also there will be a significant amount of US job creation by these corps, and further, the proposal substantially reduces the US Government’s federal deficit over the next ten years.

Seems too good to be true? Well, it is true. Read on.

Under this proposal, a US multinational corp repatriating some of its foreign earnings in calendar year 2010, needs to first compute its preliminary jobs tax credit earned in each quarter of 2010. However, this total jobs tax credit for the year 2010 cannot exceed the incremental federal income tax for 2010 caused by the foreign earnings repatriated in 2010.

This proposal works quite a bit similar to the way the Double and Triple Barreled Manufacturing Tax Credits Tied to Payroll Count Increases (my Job Creation Proposals #2 and #3) work. However, the federal income tax from the foreign earnings repatriation replaces the manufacturing tax credit based on percentages of the cost of eligible property bought and sold.

Thus, I would set the preliminary Jobs Tax Credit here, precisely at the maximums set out in my Triple Barreled Manufacturing Tax Credits, which factor in both company size and the quarter in which the net increase in full-time US payroll counts occur. And then, these multinational corps that repatriate some of their unremitted foreign earnings in 2010, would use this Job Creation Proposal #4, as well as my Job Creation Proposal #5 on Manufacturing Tax Credits Funded by Foreign Earnings Repatriation Tax, rather than either the Double Barreled or Triple Barreled proposals.

Yeah, the job tax credit and manufacturing tax credit incentives here for multinational corps are a bit higher than those for pure domestic US corps, but then that is because the multinational corps' tax credits are completely funded by their foreign earnings repatriation tax.

Let me illustrate how this proposal would work for a multinational corp, with average consolidated annual revenues of $10 bil.

Assumed Increases in net payroll counts in each quarter of 2010:

..1Q..4,000 X Maximum Jobs Tax Credit of $27,000 = $108 mil
..2Q..3,000 X Maximum Jobs Tax Credit of $25,000 = $ 75 mil
..3Q..2,000 X Maximum Jobs Tax Credit of $23,000 = $ 46 mil
..4Q..1,000 X Maximum Jobs Tax Credit of $21,000 = $ 21 mil
= Total Full Year 2010 Preliminary Jobs Tax Credit..= $250 mil

If the 2010 Total Additional Federal Income Tax due to the Foreign Earnings Repatriation, assuming say a 40% (?) Dividend Received Deduction, equals or exceeds $250 mil, then the Total Jobs Tax Credit earned in 2010 is $250 mil.

If instead, the 2010 Total Additional Federal Income Tax due to the Foreign Earnings Repatriation is less than $250 mil, then the Total Jobs Tax Credit earned in 2010 is equal to the amount of the 2010 Total Additional Federal Income Tax attributable to the Foreign Earnings Repatriation.

To create a strong incentive for businesses to retain these new US full-time jobs for a reasonably long period of time, the number of US full-time employees of this US multinational corp earning the jobs tax credit must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from the end of the quarter when the jobs tax credit is earned until the end of 2015. If the number of full-time employees drops below the 2010 quarter-end in which the jobs tax credited was earned, then recapture of this jobs tax credit would result. If this drop in payroll count occurs in the first three years, a 100% recapture will result; if this payroll count drop occurs after the first three years but before 2016, a pro-rata time portion of this jobs tax credit would be recaptured.

The CBO score will be substantially positive on this proposal for a number of reasons.

First, the current ten-year US Government budget should be assuming that none of these unremitted foreign earnings will be repatriated. This is consistent with multinational corps’ footnotes where they state that these foreign earnings are permanently invested in their foreign operations. Thus, if the US government decides to give temporary, one-time very attractive tax incentives for multinational corps to repatriate some of their unremitted foreign earnings, then this action will clearly increase the US Government financial coffers over the next ten years. I think the CBO can reasonably estimate the amount of the additional federal income taxes to be collected by the US government from this foreign earnings repatriation and thus should do so.

Second, the Total Jobs Tax Credit is an outflow in CBO scoring. However, there are direct US Government Bouncebacks…i.e. both the Federal Income Tax and the Federal Payroll Tax from the new hires. And this program is designed to highly incentivize these companies to retain their increased payroll counts for more than five years, through the end of 2015. Thus, the multiyear federal income tax and federal payroll tax inflows from the higher payroll counts, as well as any recapture of the Jobs Tax Credit, will substantially trump the first year Total Jobs Tax Credit outflow.

Third, States will be receiving substantial cash inflows from these multinational corps due to the taxable dividend resulting from the foreign earnings repatriation. And States also will be receiving substantial additional cash inflows of state individual income taxes related to the many new hires. And if States decide to include the Jobs Tax Credit in these multinational corps’ taxable income, they will receive even more funds. Because of the much improved State finances here, the US government will be able to reduce its funding for State Unemployment and Other Related State benefits.