Presently, as one of many recurring annual US tax extenders, and the only one of these tax extenders that is a real job creator, businesses receive a tax credit for incremental research expenses incurred through the end of the current year. Generally, this tax credit is computed at 20% of the excess of qualified research expenses for the current year over a base period amount.
My proposal here is to step up this 20% to 40% for small US businesses in 2010, and from 20% to 30% for larger US businesses in 2010. Also, to give US businesses more certainty, the Research Tax Credit would be extended for two additional years, at 35% in 2011 and at 30% in 2012 for small US businesses, and at 25% in 2011 and at 20% in 2012 for larger businesses. Thus, my proposal will be a much more substantial US job creator than the previous annual tax extension approach. And with the way my proposal deals with US multinational corps creatively, and fairly, the total CBO scored cost of this three-year proposal should approximate the cost of the normal research tax credit one-year extension. How is that possible? Just read on.
Clearly, companies, and the US as a whole, receive major benefits from these US research expenditures. However, there is also a major drawback to the country. The majority of these US research tax credits are given to multinational corps who subsequently generate income overseas from the fruits of this US research. Thus the end result is that these multinational corps receive both US tax deductions and also US Research Tax Credits, even though much of the subsequent related taxable income is generated overseas and thus not taxed in the US. Also, the majority of the job creation of multinational corps from this US research is overseas. Let me explain in much more depth.
From income tax footnotes in their annual reports, of the present 30 Dow Industrial Stocks, there are 12 of them which either have minor research expenditures, such as Financial companies and Retailers, or which are predominately domestic companies.
Thus, here are the remaining present 18 Dow Industrial Stocks with significant overseas operations and also significant research expenditures. Also shown here are the total Pretax Operating Income earned outside the US (or Intl Operating Income) as well as the percentage these Intl Earnings, which were generated outside of the US (or Intl % Mix), comprised of the Worldwide Earnings of each of these 18 companies in total for the last 11 years….the last two Clinton/Gore years (1999 and 2000), all eight Bush/Cheney years (2001-2008), and the first year of Obama/Biden (2009).
……………………....Intl Income....Intl Mix
Exxon Mobil……….$363.8 bil……78%
Chevron…………….$160.1 bil……74%
GE………………….....$115.5 bil…….53%
Pfizer………………...$ 89.0 bil…….85%
IBM……………….....$ 68.1 bil…….49%
Microsoft…………..$ 62.4 bil…….37%
JNJ…………………...$ 60.2 bil…….48%
Merck………………..$ 55.2 bil…….57%
Hewlett-Packard… $ 50.0 bil…….90%
Coca Cola…….........$ 45.5 bil…….67%
Procter & Gamble…$ 41.4 bil…….39%
Cisco Systems………$ 36.4 bil…….56%
Intel…………………...$ 28.7 bil…….31%
United Technologies$ 25.4 bil…….54%
3M…………………......$ 21.4 bil…….47%
Kraft Foods…………..$ 15.1 bil…….35%
Caterpillar…………....$ 14.9 bil…….53%
DuPont……………......$ 14.0 bil…….45%
Total………………...$1,267 bil……60%
Yeah, that’s correct, a monstrous $1.3 trillion of overseas earnings for just these 18 Dow companies, which represents a massive 60% of their worldwide pretax operating earnings.
But even more important, check out the annual trend in the Total Intl Pretax Income Mix as a Percentage of Worldwide Pretax Income for these 18 huge Dow companies:
2009…..74%
2008…..71%
2007…..66%
2006…..62%
2005…..56%
2004…..58%
2003…..52%
2002…..55%
2001…..48%
2000…..46%
1999…..43%
Yeah, that’s a 31% Intl income mix growth in just the last decade (43% in Clinton’s 1999 to 74% in Obama’s 2009). And get ready for these just incredible numbers….Intl income for these 18 companies more than tripled from $50 bil in 1999 to $155 bil in 2009, whereas US income for these 18 companies declined from $66 bil in 1999 to $53 bil in 2009. And this trend was most pronounced in the last four years of the Bush/Cheney Administration, with Intl income of these 18 companies growing from $130 bil in 2005 to $211 bil in 2008 (yeah, that’s up 62% in only three years), but with US income of these same 18 companies declining from $100 bil in 2005 to $85 bil in 2008 (yeah, that’s down 15% in the same three years). Whew, we clearly need some policies that will get us back much closer economically to the Clinton years.
The Bush/Cheney income tax rate reductions on the wealthy and the unfunded wars both contributed heavily to the build up of the US deficit in the 2000s decade. However, I think this US multinational corps massive shift from US income to Intl income is the single main reason for the present US double economic disaster…sky-high US federal deficit and sky-high US unemployment/underemployment rates. The earnings, along with the US jobs, were transferred overseas in the decade of the 2000s. And these companies still received massive R&D US federal income tax deductions and also R&D tax credits for doing just that. Thus the now massive US deficit ballooned from both the dramatic drop in US corporate income taxes paid by the multinational corps and also from the dramatic drop in US federal individual income taxes and payroll taxes from the US jobs transferred overseas, with the latter also causing substantial financial pressure on State government coffers, along with the additional US deficit increases from the necessary funding of State government shortfalls.
Yeah, it’s the “Leave Multinational Corp Businesses Alone” decade of the 2000s, predominately in the Bush/Cheney years, causing the present US double economic disaster. You can’t blame the US multinational corps for these massive offshoring steps to maximize their worldwide income. After all, the CEOs of these US multinational corps are rightfully working for their stockholders. However, I think you can rightfully blame the US government for either not being financially savvy enough to understand it or looking the other way while all of this long-term financial devastation to the US jobs picture and to the US federal deficit was happening in the 2000s decade. And then for the US government to pile on by allowing the foreign earnings repatriation in 2004 with a 85% dividend received deduction…..Whoa, and there were even some Democrats who voted for this US multinational corp boondoggle, that effectively forgave US multinational corps of billions and billions of dollars of what they owed the US government in income taxes.
Further, I think it is helpful to look at the changing global income mix of each of these 18 companies in the past decade.
………………………International Pretax Income Mix Percentage
…………………………………………………………............2008-2009
……………………………………………………………..............vs
…………………………………………………………............1999-2000
..........................................................................Average
………………………..2009…..2008…..2000…1999….Change
Caterpillar…………214%.....52%.......29%.....26%.....105%
GE…………………….105%.....87%.......30%.....28%.......67%
Pfizer…………………134%...118%.......82%.....55%.......57%
Microsoft……………72%.....47%.......17%.....10%.......46%
Cisco Systems…….79%......79%......41%......35%......36%
Coca Cola…………..70%......93%......56%......61%......23%
Exxon Mobil……...93%......88%......66%......71%......22%
Chevron…………….93%......75%.......59%......70%.....20%
3M……………………...50%......56%.......40%......30%.....18%
Merck………………….65%......48%.......46%......35%.....16%
JNJ……………………..55%......61%.......43%.......43%.....15%
Kraft Foods…………46%......48%.......36%.......35%.....12%
DuPont……………….92%......59%.......55%.......73%.....11%
Hewlett-Packard….73%......79%........67%......67%......9%
Intel…………………….43%......20%........26%......36%......1%
Procter & Gamble…41%......44%........46%......40%......0%
IBM…………………….47%......50%........49%......50%.....-1%
United Technologies55%......58%........45%......72%.....-2%
Total……………………74%......71%........46%......43%.......28%
To further extend the research here, below are 27 US Non-Dow Industrial Stocks that I found from a quick review which had significant International Operations, significant Research Expenditures and also pretty healthy annual worldwide consolidated income for the most recent five years. You can clearly see the growing Intl income mix trend, particularly so for the 5 Oil-Related Stocks shown here.
…………………… …..........Intl
…………………… …........Income... Intl Operating Income % Mix
…………………… ….........2009 …. 2009. 2008.. 2007. 2006. 2005
Conoco Phillips……... $7.6 bil... 76%... 54%... 40%... 53%... 47%
Abbott Labs…………... $5.7 bil... 79%.. 101%... 85%.. 138%... 55%
Google………………..... $4.8 bil... 57%... 65%... 43%... 33%... 28%
Apple………………….... $4.4 bil... 55%... 51%... 44%... 53%... 51%
Oracle………………...... $4.1 bil... 52%... 50%... 45%... 43%... 52%
PepsiCo……………...... $3.9 bil... 48%... 54%... 47%... 45%... 50%
Schlumberger………... $3.8 bil... 98%... 79%... 74%... 68%... 70%
Amgen………………..... $3.1 bil... 60%... 52%... 63%... 58%... 38%
Bristol-Myers Squibb $2.9 bil... 52%... 53%... 74%.. 126%... 82%
Occidental Petroleum $2.8 bil... 57%... 48%... 46%... 43%... 35%
Ebay…………………...... $2.7 bil... 95%... 85%.... 4%... 50%... 39%
Colgate Palmolive…... $2.4 bil... 67%... 66%... 69%... 71%... 57%
Baxter………………...... $2.3 bil... 84%... 89%... 95%... 89%... 76%
Dell……………………..... $1.8 bil... 89%... 81%... 86%... 78%... 65%
Corning………………..... $1.7 bil... 90%... 72%... 74%... 13%... 32%
Medtronic…………….... $1.5 bil... 56%... 75%... 55%... 50%... 63%
Emerson Electric…...... $1.3 bil... 53%... 53%... 50%... 43%... 46%
Honeywell…………....... $1.2 bil... 41%... 48%... 38%... 33%... 33%
Nike…………………....... $1.1 bil... 57%... 72%... 63%... 61%... 59%
Halliburton…………….. $1.1 bil... 65%... 31%... 36%... 31%... 30%
Qualcomm…………...... $1.0 bil... 50%... 59%... 54%... 54%... 44%
Kimberly-Clark……..... $.9 bil... 36%... 45%... 37%... 26%... 21%
Apache………………..... $.9 bil.. 274%.. 138%... 63%... 68%... 64%
Dow Chemical……...... $.8 bil.. 162%.. 201%... 95%... 55%... 58%
Illinois Tool Works….. $.7 bil... 59%... 49%... 36%... 39%... 36%
Texas Instruments….. $.6 bil... 32%... 30%... 26%... 29%... 36%
Deere…………………..... $.6 bil... 44%... 45%... 40%... 34%... 42%
Total………………….. $65.7 bil... 63%... 61%... 53%... 54%... 49%
My Research Tax Credit Proposals
For 2010, I would
• Increase the US Research Tax Credit from 20% to 40% for 100% domestic small businesses with revenues under a certain amount.
• Increase the US Research Tax Credit from 20% to 30% for 100% domestic businesses with revenues higher than the above small business threshold
• For corps with both US and Intl revenues, set the maximum US Research Tax Credit at 30%, however multiply this 30% by a fraction, which cannot exceed 100%, the numerator being the US pretax operating income and the denominator being the Consolidated worldwide pretax operating income (both numbers coming from the income tax footnote in the most recent annual report)
• Give corps with both US and Intl revenues a second option of instead of the above fraction of the maximum 30% approach, they would be entitled to the entire maximum 30% US Research Tax Credit, if they choose to fund it completely with their foreign earnings repatriation tax (I would set the Research Tax Credit pecking order for foreign earnings repatriation tax tranches precisely in between the Jobs Tax Credit and the Manufacturing Tax Credit)
For 2011, I would reduce the above 40% to 35% for 100% domestic small businesses. Also, I would reduce the above 30% to 25% for larger 100% domestic businesses. On multinationals, the maximum 30% drops to 25%, and the fraction is computed the same way as in 2010, and also the Research Tax Credit would be the first tax tranch for foreign earnings repatriation tax purposes.
For 2012, I would reduce the above 40% to 30% for 100% domestic small businesses. Also, I would reduce the above 30% to 20% for larger 100% domestic businesses. On multinationals, the maximum 30% drops to 20%, and the fraction is computed the same way as in 2010 and the Research Tax Credit would be the first tax tranch for foreign earnings repatriation tax purposes.
I think this three-year approach on the US Research Tax Credit gives US businesses more certainty, which they claim they really need to add US jobs.
The overall CBO cost of this three-year program should approximate the cost of a normal one-year tax extender for the US Research Tax Credit. This very desirable result occurs even though the proposal includes Research Tax Credits for three years instead of for one year and also includes a higher maximum Research Tax Credit percentage. The reason the CBO cost doesn't vary substantially is due to the fact that the majority of the US Research expenditures are made by the large US multinational corps. If these multinational corps choose the maximum Research Tax Credit option, there will be no CBO-scored cost to the US government, since it is completely funded by the foreign earnings repatriation tax. And if they don’t choose the maximum option, their high international operating income mix will substantially and fairly eat into the US Research Tax Credit they will be entitled to.
Now, let me address how I would consider paying for this strong US job-creating proposal, in addition to the above mentioned substantial foreign earnings repatriation tax funding.
For the largest funding vehicle, I would focus on the incentives to move US job overseas and try to reverse this financially devastating trend. It’s all about lower wages and lower corporate income taxes offshore. I have no problem with a US multinational corp setting up a manufacturing plant in Ireland for its very favorable corporate income tax environment, and then those products manufactured in Ireland getting subsequently sold to somewhere in Europe. Likewise, ignoring the unfair air pollution problem which needs to get addressed in climate change legislation, I have no problem with a US multinational corp manufacturing products in places like the Puerto Rico tax haven or in Mexico, and then these manufactured goods are subsequently sold to somewhere in South America.
However, if these products manufactured by a US multinational corp in a low-taxed or low-wage environment offshore are subsequently sold in the US (the Manufacturing Bounce Back), then I do have a major problem with that. Therefore, to be fair, I think the US should impose a duty or tax on US multinational corps that set up manufacturing operations in low-taxed and/or low-waged offshore locations, and then subsequently sell these products back to US customers. This duty or tax, payable to the US government, with a portion of it subsequently shared with US States in some fair manner, should be based on a percentage of the sales price of the products sold to the US customer.
To substantially soften the blow to multinational corps subject to this duty or tax on Manufacturing Bounce Backs, I think I would give them an option of paying for this duty or tax by a like amount of repatriation foreign earnings tax from repatriating foreign earnings.
Second, the 2000s were a lost decade to the US middle class, to those below the middle class, to small and mid-sized purely domestic businesses, and to the country as a whole, with the resultant massive federal deficit increase. When I study who benefited the most from the demise of the US middle class, the US have-nots, and the domestic businesses, I see two main major industries. And these two benefiting industries unfairly placed severe cost pressures on these suffering groups during the decade of the 2000s.
First, there’s the health care industry….all three main parts of it….the health insurance industry, Big Pharma, but just as important and probably even more so, the non-profit hospital industry. The massive rise in health care costs in the 2000s decade put immense financial pressure on both US individuals and on US businesses. Further, in the recently-passed health care legislation, all three of these made out like bandits and hosed the outfoxed US government. The health care cost increases in the 2000s decade will be significantly curtailed with the new health care legislation, but not by nearly as much as they should be. The day will come for these health care industry outsized beneficiaries, but since I’m all health cared out, I’ll pass on them for now. However, Big Pharma would get hit heavily and fairly by my above import tax proposal on Manufacturing Bounce Backs.
But the second and just as significant industry beneficiary is Big Oil. In the 11 years from 1999 to 2009, Exxon Mobil earned worldwide consolidated pretax income of $468 bil and Chevron earned $217 bil, with this total of $685 bil comprising 32% of the total earnings for these 18 huge US multinational corps. But more to the point, Exxon Mobil generated 78% and Chevron 74% of their earnings overseas for that 11 year period. And in the most recent year 2009, it gets even worse, with both Exxon Mobil and Chevron generating 93% of their earnings overseas. Further, in 2009, Exxon Mobil generated 30% of its worldwide revenues in the US, but still only generated 7% of its pretax earnings in the US....there's clearly something out of synch in 2009, partly due to the LIFO Inventory tax loophole in the US, but there's also got to be something unusual going on with the cost allocations between the US and foreign.
Exxon Mobil has paid paltry amounts of US income tax over the years in comparison to its incredibly high profits. When I do the math from its annual report tax footnotes, and add in its very lucrative tax benefits from its executive stock based awards, Exxon Mobil's effective US federal income tax rate paid on its total US pretax profits in the past 11 years is less than 25%....and that's based on severely-deflated LIFO Inventory earnings. At December 31, 2009, the current cost of Exxon Mobil's inventory was an incredible $17.1 bil higher than, or triple, the recorded inventory in its financial statements, much of which was based on oil prices of decades ago. I think the FASB should get its act together and ban unrealistic LIFO Inventory. Pretty much the rest of the world has.
Both of these Big Oil companies are getting massive US tax breaks from tax loopholes like from LIFO Inventory, from Percentage Depletion, and from expensing Intangible Drilling Costs. And other Big Oil companies benefiting from these tax loopholes include foreign-owned companies BP and Royal Dutch Shell, both of which generate a significant portion of their revenues and earnings in the US.....BP generated $84 bil, or 35% of its worldwide revenues, in the US in 2009. I would eliminate these tax breaks for the entire oil industry, for all oil and oil-related companies over a certain size, and scale it in over say a ten-year period. Also, I don't think the oil industry has any business receiving the very lucrative Domestic Production Activity Deduction and I would eliminate its eligibility for all of the oil related industry.
With its severe cost pressure placed on US businesses and US individuals, Big Oil was a major contributor to the lost decade of the 2000s. Thus, I think it is only fair for Big Oil, and for the entire oil related industry for that matter, to now step up to the plate and do its part and pay for some of the tab of these US job-creating Research Tax Credits proposals that could help turn the Bush/Cheney driven 2000s lost decade into an Obama/Biden driven 2010s recovery-from-a-deep-economic-crater decade.
My hunch here is with all of the above substantial funding, there should also be a lot of money left over to reduce the massive US deficit.
And frankly, I think a fair CBO scoring here could well permit my Research Tax Credit proposal for the year 2012 to be made permanent for all subsequent years. Now that would be what I call Increased Business Certainty, the ideal business environment to jump-start job creation.
And further, I think there is enough funding here in the above proposals to also give an additional Research Tax Credit for any US Research that is clearly Green....i.e. whose purpose is to help make the US Energy Independent as quickly as possible. Perhaps call it the Steven Chu Premium Green R&D Tax Credit.
