Moody’s estimates that there is roughly $1.4 trillion dollars belonging to U.S. corporations that has been building up in foreign bank accounts for years now to avoid the 35% corporate tax that would be levied on them if they were brought back to the U.S. Of course, getting that $1.4 trillion back to the U.S. has been a critical component of the Trump administration’s tax reform bill as Gary Cohn and Steve Mnuchin have repeatedly argued that the money would be put to good use building factories and creating jobs for American workers.
That said, if history, math and logic are any guide, then the overwhelming majority of that money would be promptly returned to shareholders via stock buybacks and dividends immediately upon hitting U.S. shores. In fact, as University of Chicago law professor Dhammika Dharmapala told the Wall Street Journal, when a similar tax holiday was enacted in 2004 roughly $0.94 of every $1.00 was spent on buyback and dividends…something Gary Cohn apparently found out for the first time via a recent impromptu survey that yielded some ‘surprising’ results, if only to him…
VIDEO: CEOs asked if they plan to increase their company’s capital investments if the GOP’s tax bill passes.
A few hands go up.
“Why aren’t the other hands up?” Gary Cohn asks.#WSJCEOCouncil pic.twitter.com/TD2oAlN27S
— Natalie Andrews (@nataliewsj) November 14, 2017
Adding insult to injury, Credit Suisse analyst Vamil Divan says that not only will repatriated cash not be used for capital investment and job creation, but it could result in the exact opposite as Tech and Healthcare companies use their new treasure chests to fund a massive wave of consolidation which would inevitably result in the elimination of 1,000’s of duplicative jobs. “I think we’re going to see the consolidation in the industry we’ve been waiting for,” Dr. Divan said.
Analysts predict Pfizer Inc., would use repatriated money to do a big deal. The company has about $22 billion in cash overseas, and Chief Financial Officer Frank D’Amelio has said its priorities for using any money brought to the U.S. after tax changes “are dividends, share buybacks, investing in the business and M&A.”
In the three years after the 2004 tax holiday, companies increased their spending on mergers and acquisitions by 47%, on buybacks by 37% and on paying down debt by 13%, according to a Credit Suisse HOLT analysis of how the 50 companies with the most earnings overseas at the time changed their spending.
Of course, as we recently pointed out via SocGen, it’s certainly not as if investment in the U.S. has been restricted by a lack of access to capital. As the chart below illustrates, there has been plenty of capital flowing into corporate treasuries in the U.S. since 2010 but it all seems to find its way to shareholders.
That said, U.S. companies may be more willing to invest at home if the corporate rate is cut, as proposed, by 14 percentage points to 21%. “The lower the rate, the more attractive it is to do business here,” said Mitch Cohen, who leads Ernst & Young’s global life-sciences tax practice.
Then again, if the assumption is that a new administration will come along in 3 or 7 years and simply reverse corporate tax cuts then what’s the point?