US corporations are making fewer domestic hires and investing less in US operations due to cash trapped overseas, according to a recent survey by the Association for Financial Professionals (AFP). In addition, high US corporate tax rates create an incentive for companies to leave cash abroad, often permanently.
In follow-up questions to AFP’s 2011 Business Outlook Survey, 26% of respondents with operations abroad say that excessive US corporate tax discourages their organisation from bringing cash back to the US and using it to invest in corporate growth in the form of new hires, capital investments, or research and development.
Proponents of the current tax rates on repatriated foreign earnings say the tax deters companies from making investments in non-US operations and stems the flow of American-based jobs overseas, but AFP members indicate that this is not the case. Of those with non-US operations responding to the survey, two-thirds indicate that the tax on repatriated foreign earnings at current rates has little to no impact on the decision to begin or continue operations outside of the US.
“Capital is mobile. Companies have choices about where to locate and where to invest,” said Jim Kaitz, AFP’s president and chief executive officer (CEO). “For US companies to grow domestic operations and make hires here, AFP believes that the current corporate tax regime must become competitive with that of other nations.”
In a January 2011 policy statement, AFP stated that US companies should be permitted to repatriate foreign earnings at a tax rate that allows the US to compete for investment of those earnings with other countries that tax those earnings at significantly lower rates. AFP recently delivered this message to members of the 112th US Congress, the White House and staff of the US Treasury.
Since US companies can choose when and if ever to repatriate earnings that are taxable in the US, the lost tax revenue is extremely low. In fact, a more favourable tax treatment might increase tax revenue in both the short and long term because companies would no longer have a strong incentive to avoid high US taxes by reinvesting foreign earnings elsewhere. The likely inflow of capital to the US could stimulate capital investment and hiring, contributing to economic recovery and long-term economic growth.
Reported estimates have US corporations holding US$1 trillion in cash and cash-like investments abroad.
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