The Fed Chair puts his weight behind enticing corporates to bring cash home via lower taxes; Obama unconvinced.
Still skulking in the shadows of the corporate tax debate is the topic of another “tax holiday” to get corporations to bring cash back to the US at a lower rate to help boost the economy. But recently it’s received some help from Federal Reserve Chairman Ben Bernanke, who in appearances before Congress in February and in March, said bringing corporate cash back would give the economy a needed boost.
Another tax holiday, which has been dubbed HIA 2.0 (see related story here), would follow a portion of the 2004 American Jobs Creation Act, which cut to 5.25 percent from 35 percent the tax rate US MNCs pay on their foreign earnings.
Although Mr. Bernanke felt another holiday would help the economy much as the 2004 break did, he felt a better solution would be to just lower corporate taxes altogether. But how low, he would not say, although he noted that “a lot of countries have cut their rates down into the 20s.”
When asked in testimony before the House Committee on Financial Services this week how much cash corporations were “sitting on,” Bernanke estimated the number to be about $2tn, but added that much of it was overseas. He was then asked whether it would be good for the economy if that cash were “moved into capital investing or hiring people” and Bernanke said, “Yes.” Asked whether the US should encourage or demand the money be returned to the US, Bernanke said, encouraging works better. “That is one of the ways QE2 works,” he told the committee. “It lowers yields and makes cash-like instruments like treasuries and makes it more expensive to just hold cash. It makes people look for other things.”
Mr. Bernanke said Congress could do the same thing by considering his suggestion that the US explore a territoriality provision, which is move from a worldwide system of taxation to a territorial basis for taxation. “If you were to allow firms to bring back cash from abroad without additional taxation or limited taxation there might be more incentives for them to bring it back home and use it domestically,” he said.
There are two basic types of international tax systems: worldwide and territorial. Currently the US tax system is a hybrid of the two, although primarily a worldwide system where US domestic companies are subject to taxation on all income regardless of where income is earned — domestically or internationally. Under a territorial system, they would be taxed only on business activities conducted within US borders.
Mr. Bernanke gave similar support to lower taxes in testimony before the House Budget Committee in early February.
Tax cut not in the cards for ’12
Although Mr. Bernanke has been making the case for lower corporate taxes, the White House is not convinced it’s the right route and didn’t include it in its latest budget. Following the release of Barack Obama’s 2012 budget (see related story here), Treasury Secretary Timothy Geithner dismissed suggestions that the administration would propose a tax holiday.
Mr. Geithner didn’t shut the door on lower taxes, however, noting that the White House is looking for more “comprehensive reform.”
…but maybe ’13?
In an equity strategy note to clients, Bank of America Merrill Lynch said a US corporate tax rate cut “is becoming more likely, but any cut is unlikely to take effect until 2013, even if passed earlier.” The bank said it does not think a temporary tax holiday is likely in 2012 or 2013, “but a lower US corporate tax rate would substantially reduce repatriation taxes and that would probably lead the US to eventually adopt a territorial system with no repatriation taxes at all.”