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 Corporations betting we’re suckers with a short memory

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The Propagandist
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PostSubject: Corporations betting we’re suckers with a short memory   Wed Jun 22, 2011 6:11 pm

Companies Push for Tax Break on Foreign Cash

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas.

But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.

Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.

This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program “did not increase domestic investment, employment or research and development.”

Indeed, 60 percent of the benefits went to just 15 of the largest United States multinational companies — many of which laid off domestic workers, closed plants and shifted even more of their profits and resources abroad in hopes of cashing in on the next repatriation holiday.

Whole story:
http://www.nytimes.com/2011/06/20/business/20tax.html?nl=todaysheadlines&emc=tha2

Graphic:
http://www.nytimes.com/imagepages/2011/06/20/business/20tax-graphic.html?ref=business
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lmm
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PostSubject: Re: Corporations betting we’re suckers with a short memory   Wed Jun 22, 2011 6:38 pm

http://www.windowsitpro.com/article/paul-thurrotts-wininfo/microsoft-government-tax-holiday-139567

So is the tax holiday a win-win? Maybe not. This scheme was tried once in the past, in 2005, when a similar tax break returned $312 billion to the United States. But 92 percent of the cash was returned to corporate shareholders and didn't directly impact the US economy in any meaningful way; and just $16 billion in tax revenues was collected at the time. A study of the holiday noted that it "did not increase domestic investment, employment, or research and development." Many of the bigger companies that took advantage of the tax break—especially giant pharmaceutical firms—actually laid off employees and cut capital spending in the United States for years afterward in a bid to trigger further breaks.
To avoid repeating this debacle, the US Congress could require companies that take advantage of a temporary tax break to companies that hire and invest in US-based infrastructure. Not that it matters, perhaps. So far, the Obama administration has been overly critical of the proposal, and many activist groups are already complaining about companies like Apple deriving huge profits from overseas holdings with questionable human rights agendas.

Seems the same story is every where. It does seem to be a repeat of a failure.
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Ubu
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PostSubject: Re: Corporations betting we’re suckers with a short memory   Wed Jun 22, 2011 7:00 pm

Help me understand something here Prop........

A shareholder invests in a company to make a profit. Granted, most profits to share holders come from the buying and selling of the stock rather than from straight dividends, but if you are in "it" for the long haul, and the company is "profitable" why are they allowing cash reserves to sit overseas and not be paid out as dividends. Why are they not clamoring for the company to release those funds?

I know the money would be taxed upon the return to the US, driving the over all profit margin down, but what good is it sitting in a bank? Just how much cash reserves does a company need to keep "on hand" for "emergencies"?

Do you understand where I am trying to go with this?

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The Propagandist
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PostSubject: Re: Corporations betting we’re suckers with a short memory   Wed Jul 13, 2011 8:54 pm

Ubu wrote:
Help me understand something here Prop........

A shareholder invests in a company to make a profit. Granted, most profits to share holders come from the buying and selling of the stock rather than from straight dividends, but if you are in "it" for the long haul, and the company is "profitable" why are they allowing cash reserves to sit overseas and not be paid out as dividends. Why are they not clamoring for the company to release those funds?

I know the money would be taxed upon the return to the US, driving the over all profit margin down, but what good is it sitting in a bank? Just how much cash reserves does a company need to keep "on hand" for "emergencies"?

Do you understand where I am trying to go with this?



I apologize for taking so long to get back to you.

That money is sitting off-shore so the rich can get richer by getting a larger dividend distribution. They don’t want to sell their stock; they’d rather have the cash.

The tax holiday allows corporations to pay a very small tax, allowing larger dividends which will more than make up for the tax paid at the ordinary income rate they would pay instead of the capital gains rate.

It’s sort of like the game show where you win a prize. You have a choice between a car worth $20,000 or $10,000 in cash. If you take the car, you have to come up with the cash to pay the tax on it. If you take the cash, you can pay the tax, in cash, out of the cash you won.

There are two reasons an investor buys stock in a company: Income (dividends) or increase in value (capital gains). Which motivation to invest determines how they view what the company does with the excess cash beyond that needed for operations and rainy days.

There are the so-called “widow and orphan” stocks, primarily for income. The recipients rely on steady payments for support or income during retirement. These are the stocks in well-established “blue chip” companies. Some of these were wrecked during takeover mania of the 1980s (remember Nabisco vs. R.J. Reynolds?). These are the kinds of stocks that people hold forever, as long as the income stream continues.

The income from dividends is taxed at your personal income tax rate. These individuals are usually at the low end of the income range.

These are also usually smaller investors who don’t have much clout with the Board of Directors.

There are the other so-called “growth” stocks in which investors do not need income, but desire an increase in wealth. They look for stocks whose values are increasing as earnings are reinvested in the company. These are the kinds of stocks that are sold off periodically to obtain cash, as long as their value is increasing.

The income from the sale of stock is taxed as capital gains. These individual are usually at the high end of the income range.

These are also usually the “big players” who vote large blocks of stock, have influence in choosing the Board of Directors, and have influence with the sitting Board of Directors.

Ray Kroc, founder of McDonald’s Hamburgers as a franchise, could only pay his secretary, June Martino, in company equity stock in the early days. As time went on and stock increased in value, she continued that practice. When McDonald’s went public, she was worth (in today’s dollars) $30 million. She sold $5 million of that stock and retired to Palm Beach. Dividends from the remaining portion kept her living in the style to which she became accustomed.

If they get that tax holiday, then those investors voting large blocks of stock and having clout with the Board of Directors who make the decision to keep the money off-shore can receive their dividends which, even though taxed at their high-end income tax rate, would leave them with a higher cash yield than that from even their lower capital gains rate—a difference of roughly 20% more cash available to spread around. However, with the “Hollywood accounting” corporations use, it could be significantly more than that. They may even pay no tax at all, like GE, once the tax calculations are done

And with the “big players,” we’re talking great gobs of money here.
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