When I started this series of 2018 predictions I said the recently passed U.S. tax law was going to have a profound impact on upcoming events. Having had a chance to look closer at the issue I am even more convinced that this seismic financial event is, as I wrote above, a $591.8 billion taxpayer ripoff. This is not to say there aren’t some possible public benefits from the repatriation, but it’s fairly clear that the public loses more than it will ever gain.
In case you don’t follow these things, multinational U.S. companies have, since 2005, squirreled away about $2.5 TRILLION in profits overseas because U.S. tax law allowed those profits to go untaxed until they are returned to the USA. Understand that this $2.5 trillion is more than just the profit made on overseas business: many companies changed their ways of doing business to divert what would have been U.S. domestic profits, sending them overseas for parking to await a business-friendly U.S. Administration that would cut them a sweetheart deal to bring back all that moolah. The amount of U.S. corporate income tax that went unpaid during this 12 year period was 35 percent of $2.5 trillion or about $875 BILLION. That’s taxes of $73 billion annually for 12 years that went unpaid — about five percent of the federal budget for those 12 years.
Admittedly U.S. tax law was out of step with most of the rest of the world and the new law changed much of that, cutting the corporate rate to a more competitive 21 percent (from 35) and ending U.S. taxation of foreign profits entirely from 2018-on (foreign taxes still apply). But it is also clear that the companies keeping profits overseas won big in the repatriation deal — bigger than most readers even understand — which is what this prediction is all about.
The new tax law says companies must bring those profits home but instead of paying the 35 percent tax they’d been working so hard to avoid or even the new 21 percent corporate rate, those profits will be taxed at a special 15.5 percent rate, saving the companies about $500 BILLION they would have paid under the old rules. That’s the $500 billion President Tump says will be converted mainly into new jobs, pay raises, and aggressive R&D.
Yeah, right.
Why, then, am I calling this a $591.8 billion taxpayer ripoff, rather than just a $500 billion ripoff? Because the law allows companies to pay these back taxes over EIGHT YEARS. They may owe $375 billion, but will only have to pay this year $30 billion, leaving $345 billion in essentially free money to play with — money that wouldn’t otherwise be available.
“… Although a 10% US shareholder’s tax liability will be triggered when it includes the offshore earnings in its income in 2017, the US shareholder is entitled to elect to pay off this tax liability in installments over eight years, as follows: 8% in each of the first five years after 2017 (2018—2022); 15% in the sixth year (2023); 20% in the seventh year (2024); and 25% in the eighth year (2025)…”
That’s an average $255 billion in free money per year over the eight year period. According to the Wall $treet Journal, today’s corporate prime rate is 4.5 percent so by not having to borrow this money corporations are saving $255 billion * 0.045 * 8 = $91.8 billion over the payback period. This makes their actual tax rate 283.2/375 * 0.155 = 11.7 percent.
So what? Why should we care?
Beyond the simple fact that you and I could never get a deal like this if we had gone 12 years without paying our taxes, there are two more reasons why we should care and those reasons are the essence of this prediction. First, you know that having handed over this unprecedented windfall Congress will immediately look for parts of the federal budget to cut, making-up for the loss of revenue. Whether we are talking about closing national parks or cutting Medicare (I turn 65 this month), citizens are going to be affected.
Second, economists are pretty much in agreement that the majority of the $2.2043 trillion in net repatriated profits will be used for share buy-backs, propping-up both earnings and stock prices. The present combined market cap of all U.S. public companies is about $30 trillion with repatriating companies likely to buy back at least $1.5 trillion (five percent) of that in the near future.
Again, what’s wrong with that?
What’s wrong is we have already gone eight years without a recession and all these foreign profits going into stock buy-backs will create a weird effect once the inevitable recession is upon us, probably in 2019. Sales will drop, the economy will contract (that’s the definition of a recession) but earnings and stock prices will remain stable or even rise as CEOs and CFOs pit buy-backs against the recession, their hope being to somehow bridge the earnings gap and get to the next period of expansion without a market drop.
American CEOs and CFOs do such things because their average tenure is just four years, all of which is spent trying to ensure their own comfortable retirements. With that golden parachute always an average of only two years away, why not try something — anything — to keep share prices up? And so they will. And maybe — just maybe — it will work.
But more likely it won’t work. The next recession will start, markets will at first appear to defy gravity through buy-backs, but eventually and inevitably what went up will come down… hard.
It will be like 2008 all over again, just in time for the next Presidential election…
More predictions to come soon!
Failure of basic math. There is no tax loss. Without the tax bill the corporate tax is 35% of 0=0.
By putting in a lower rate, we get 15% of a large chunk. Under W, the rate was just 7% for this amnesty.
Failure of logic. Bill or no bill aren’t the only two options here. Congress has power to tax as they see fit and throw people in jail for not complying. It’s not impossible for them to tax all that overseas lucre at the full corporate rate, merely uncomfortable.
Life is much simpler and more sensible when you understand that one’s supposed betters are only better at lying and enforcing frauds.
I can’t see other governments sitting still while companies registered in their territories, as most foreign subsidiaries holding these assets are, get taxed by the US on money also held in their own territories. Not good optics, that. Maybe Britain and Germany should start taxing US companies on their assets on US soil too.
Furthermore no fraud is being committed. Money held abroad isn’t taxable under US law. Full stop. Not paying tax on it is perfectly legal.
Can’t believe I’m actually defending Trump here. It makes me feel a bit dirty, but here goes. It’s maybe arguable Trump could have pushed a tougher deal, but absent some kind of deal that money was not coming to the US. That’s just a fact. Bob arguing that US government services will have to shut down because of this deal is. Well, I don’t even. Exactly what money would have been paying for these services if the money had all stayed overseas?
Bob – what happened to prediction #2?
@Tom He made two predictions in the last post. What he didn’t do is discuss the “Jihad” that everyone wants to know about rather than this filler.
C-level bonus packages should be paid out ver the 3 years *after* the C-level weasel leaves his/her post. You know, like us poor slubs given 3-year stock vesting deals have to endure..
Oh such a rosy scenario. I shudder to think what a gloomster might predict.
I predict that every time Bob says “more tomorrow” it will continue to be a meaningless statement. Just like “I’ll address it in the next column”, or “more details coming soon”.
I’ve been reading this colum for a long time, and I don’t think he’s ever actually posted information when he says he will (mine server included). I predict it will only get worse in 2018.
I also see some possible subliminal messaging going on…over the last year he’s posted columns titled things like “I’m not a crook”, and “rip off”…maybe his subconscious is starting to bother him…but probably not.
Bob,
Gotta concur with other posters, 35%, or 21% of 0 is 0.
There was no way these companies were bringing this money back without the policy change.
You sure sound like a butthurt liberal in this column.
Well, if there’s anyone who knows about butthurt, it’s conservatives. They do have the highest rates of hidden homosexuality.
The tax bill is a step in the right direction. I owe a small business in California (yeah, I know) where the tax burdens are very heavy as is the cost of doing business. The lower corporate tax rate will help our effort to remain in business and be a bit more competitive.
@Bob you know the CEO’s in Silicon Valley far better than I do, so if you believe they will reward the shareholders at the expense of the customers and the greater good, I have to believe you. In my little world, we won’t be doing that.
And raises for your employees, right?
Bob is a Liberal and he views a citizen’s wealth as belonging to the government so any interruption of money not going to taxes is evil in his eyes. He should stick to TECHNOLOGY and leave economic predictions to the idiot from the NYTs via Princeton, Nobel Laureate Krugman who predicted an economic collapse if Trump were President this past year.
Dan Kurt
AMEN. Instead of recognizing the original problem this article (incorrectly I believe) obsesses over “other peoples money” being used in ways Bob disapproves of. And who knows what other people will actually do with their money.
Maybe some of this outrage should be directed at previous tax policy that encouraged that overseas bubble.
While maybe not the best new tax policy my opinion is that this new law is a long needed step in the right direction. But that is just opinion, as was Bobs.
If you look at history companies always do share-buybacks when prices are high and 10 years later when share prices have dropped then it looks like a bad deal. Rarely do companies buy their own shares when they are cheap (Interestingly Warren Buffet is the exception here -))
The reason share-buyback are usually so bad for companies is that they are used mostly by the management of the company to maintain their bonuses but keeping share prices elevated. This is just a way of deferring share price falls.
The fact that there has been so many share buy-backs going on is the best indication that the share market is overvalued.Share buybacks are dumb money. Ofcourse i expect it to get more overvalued in 2018 as the share buy-backs continue but I expect a share crash late 2019 at the moment which will scupper Trumps re-election. Ofcourse who would want to be president next. -)
The logically conclusion to share buybacks and Central Banks buying shares (like the Swiss and Japanese) is the end of free-market capitalism and an economy that is run by state and rich elites.
Sorry Bob. On this particular subject I’m afraid you haven’t a clue. You know so little you dont even know enough to know what you dont know.
The US is the *only* country in the world that demands tax on all *world* income of US corporations and *individuals* even if they have zero domestic US income. The US is the only country in the world where all this world income must be accounted for in accordance with US tax law. Even if US tax law is in direct contravention of the local law where the income is actually earned. Which it is in all major trading nations. For large corporations this is less of a problem. Thats why they all have arms length trading companies working through shell companies in third party tax havens. It is a basic requirement to conform to local law.
Individuals on the other hand are completely screwed. Expats living and working in the EU are faced with the choice of either breaking local law or breaking US law. Its that simple. Unless you are very rich, which most of them are not, in that case its just a few more billable hours for your tax lawyers. Now this is where it gets totally Kafkaesque. At any time the IRS can access you (or your company) for any notional non compliance with IRS tax laws (all 70K pages) and given the nature of the tax regulations the penalties can be up to 200% plus of the original income. And as added bonus for individuals the IRS can now take away your passport if they have decided you owe them over $50K due to something you did not know about from years ago. Lived decades outside the country and decided you want to end the hassle by renouncing your citizenship. Then you have to pay a 50% exit tax on all you assets. Value as assessed by the IRS. Local law does not apply. Just like the good old Soviet Union and Nazi Germany.
I am bringing this up only to illustrate just how uniquely arrogant, nasty and stupid US tax law is. And ultimately counter productive. No responsible US corporation once a largish amount of its revenue came from non US sources would do other than what the large US corps have done for many decades. In the past when it was just manufacturing companies then the level field was fairly even between the final tax rate paid by US, German, French and Japanese companies. In theory the domestic corp tax rate may have been 40% / 50% plus but none of them actually paid more than about 15% net. Its only with the rise of i.p based tech companies that the opportunities to reduce the net tax rate to a few percent arose. Mostly for US companies. European tax law does not gives such wide latitude for domestic non manufacturing companies.
Why does this tax law insanity continue decade after decade even though all those inside in the Beltway know just how stupid it is? Because its a proven vote winner for a certain type of Democratic politician who base their career on the rhetoric of soak the rich class warfare and anti- “Big Business” slogans. People like Charles Rangel, the guy responsible for the most recent round of foreign tax stupidity. So stupid even the IRS wanted nothing to do with it for years. And who I might add got mysteriously very rich during his very long public career. As these people always do.
And why will a large chunk of the repatriated money go into stock buy backs? Again, because of current tax law. Because of the double taxation rules with dividends the most tax efficient way of returning the money to the stock holders is through the capital gains created by stock buy backs. Get rid of the double taxation of divides, and most stock buy backs go away. Thats they way it works in other countries.
The asset stripping of IBM through stock buy back would not have happened if US tax laws were saner. And thats why will the Apple money, for example, not go into rebuilding the manufacturing plants they used to have in the 90’s. Like the one in Sacramento. Because both Fed and State tax law now make it non viable.
Never wonder why the aerospace industry never recovered in SoCal after the crash of the early 90’s? Like it did everywhere else. It was not just CalEPA and CARB that made manufacturing so difficult in Cal. The state introduced an inventory tax with was pretty much the last nail in the coffin for anyone trying to manufacture anything in the state. The tax is gone now. But so is the several 100K’s of manufacturing jobs in the companies that used to operate in Cal. All long gone. To other states.
See, tax law is complicated. Almost never good, almost always unintended consequences. All bad.
Bravo! Thanks for reminding us of the Berlin Wall, American-style.
“The US is the *only* country in the world that demands tax on all *world* income”
Actually, there is one other country that does: North Korea!
Very well written! Thanks for taking the time to actually provide facts.
Echoing jmcc’s reply as well as others above. The tax code for both individuals and corporations has grown incredibly convoluted and complex to the point where if the IRS decides to audit your returns, they will find something, and you will pay the penalties.
Eventually, we will need to get to a flat tax and ultimately a Fair Tax sytem in order to truly supercharge the economy. When you sit down and really think hard about it, corporations shouldn’t be assessed ‘income’ tax at all. Who actually pays corporate income tax? The customers via product prices, and owners via dividend taxation. Corporations may be legal entities treated as if they are a living thing, but they aren’t. They are essentially partnerships between people who own the stock. The profits of a corporation should fully pass through to the owners of the stock. Even corporationstht own other corporations ultimately have human owners. Without all of the infrastructure in place dedicated solely to tax compliance, as well as paying the taxes on each individual product profit, the benefit to customers, consumers and the economy would be unimaginable. Corporations would have no need for the double-Dutch Irish shama-lama-bing-bang, so no profits would need to be hidden. Corporations could defer incurring a tax burden by apportioning some profit to retained earnings for operations and things like acquisitions, pleasing Mr. Buffett, and declaring nice fat dividends to the common stock owners like you and me, who would declare those profits on our individual income tax returns. With the corporate tax problem solved, the individual tax code could then be greatly simplified, instituting a flat tax sytem, on the way to a Fair Tax, consumption-based system.
Well, a conservative boy can dream…
Through the 20th century, when the US was winning all the international tax games, Americans thought the system was great. Now other countries are fighting back, and the system is suddenly unfair.
Bob you avoided the mist obvious issue of Apple, a company you claim to be an early employee of. You also spent time in Ireland, where Apple got it’s big breaks.
Apple got their breaks from Charles haughey personally. John skully met with him and almost certainly give him a bag of cash. Haughey was know to take bags of cash. Shortly afterwards he was forced from office under multiple scandals.
This is not just tax avoidance but bribery and fraud. The penalties on that could not only be in the billions but involve criminal charges. In fact the EU ruled that apple has to pay 17 billion in tax. That is actually much lower than what it would be if apple were found criminally liable.
Around the same time the h1b came into being. Originally 40 percent of the visas were required to go to n. Ireland. The immigration act of 1990 was written by two Irishmen. Ted Kennedy and Bruce Morrison.
Haughey had some success stimulating the irish economy but everything blew up during the financial crisis. The schemes didn’t end there as you can see. The h1b is slowly killing American tech while these tax cuts will do little to help.
Cringely just can’t stand it that it was a Republican that actually dealt with H1B visas he’s been complaining about. It’s a threat to his worldview of Republicans only in it to help corporations, so he has to reinforce that idea while downplaying the H1B fix that has happened so far.
Bob!
I am overjoyed you are sighted again!
As a reader since the late 90’s I’ve always treasured your perspective.
I know yo have a lot on your plate just regaining your vision but I would
love some sort of ranking/karma system to cull the right wing nutballs (see above)
from the feed so a more thoughtful conversation could ferment.
I wish you an awesome year!
@Dean clearly you’re not that big of a fan of Cringely otherwise you would know that Bob stopped responding to comments once the Mineserver folk flocked here over a years ago. It’s unfortunate because us long-time supporters used to love having back and forths with him, but his fear of that population seems to have kept him out of the dialogue sadly…
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Also just FYI, I’m very liberal, like Bob, I just happen to disagree with him on this article. You can share the same general beliefs and have disagreements, that’s OKAY. People who think it isn’t is why there is such a divide in politics where nothing seems to get accomplished. All this name calling and trying to label everyone just because they disagree with you, it’s got to go.
Fan of compassion, not a fan of hate.
@Dean and yet you’re resorting to name calling and lobbying to have those who disagree with you removed from the site. This is not compassion and is more in tune with hate. Perhaps you prescribe to the school of “Do as I say, not as I do.” Obvious hypocrite is obvious. Luckily for you, Bob prescribes to the same mantra…
Cringely probably supported the California plan to raise taxes on companies to try and get some of that tax cut. He probably figures there will be no loss of companies to other states, and if there is he will call that theft by those states.
[…] I, Cringely – 2018 foreign profit repatriation is a $591.8 bn taxpayer ripoff 3 by sjcsjc | 0 comments on Hacker News. […]
So – if the companies give the money to their shareholders the tax will be:
21% corporate tax
20% personal tax by the shareholders – this is probably low
for a total of 42% total tax.
Where does the government lose out on this
Bob your logic has failed you here. You claim that because Congress isn’t taxing these offshore monies at the full 35%, that it’s a “ripoff”. But you also state, correctly, that the old tax rate of 35% was not competitive. So by your own statements, the only way the U.S. taxpayer would not be ripped off would be to have an uncompetitive tax rate??
That’s like saying if Wells Fargo isn’t charging me 20% interest on my mortgage, while every other bank is charging 4%, poor ol’ Wells Fargo is getting ripped off.
That corporations do their utmost to avoid paying taxes I would say that is as it should be. That the tax code is so complex as multiple interest groups (think farmers- top of the list, oil producers, real estate, home builders and the list goes on) have lobbied for their pounds of flesh that falls on our elected officials. That the electorate finds themselves the unwitting draft horse forced to carry the burden is more a convenient fiction than the truth.
The top 5% of income earners in the US accounts for 80% plus of the total income taxes paid by all Americans so instead of yelling about the “billionaire class” and calling for their heads we should ease up and shut up. FWIW I believe if we did away with so many of the tax breaks that distort the free market and result in misallocation of resources we could lower overall personal and corporate taxes.
First of all, those companies were doing nothing wrong. That money was earned and taxed and held in other countries, in which the us has and claims no jurisdiction. Nothing was being dodged. They can put that money in whatever bank account they see fit perfectly legally and spend it abroad how they see fit.
I’m with the other commenters on this, 35% of zero is nothing. Clearly without some kind of deal, that’s exactly how much revenue the US government was going to get out of this momey – nothing. Pretending that isn’t true is pure fantasy.
Meanwhile a British politician – Boris Johnson – gave up his dual American citizenship a few years ago. He’s never lived in the US, but when he sold his house in the UK the IRS went afeter him for taxes owed on the revenue. Unbelievable.
Sir you are right on point! I do think we are heading for another recession and this one despite some economist thinking the numbers are just not there will I believe be worse than the Great Recession. I am old enough to have some awareness of how the economy used to work in the 50 – early 70s. Our corporations had not mostly become huge multi-nationals. They were based in the US and had to deal with very high taxes. They spent there money in an effort to avoid tax. Then everything changed in the late 70s. The idea that a CEO’s only responsibility was to every increasing owner equity. Everything else took a back seat. Maintenance, new products, efficiency, I mean everything. And since the CEO’s compensation was based off that increase, well we know what has happened today economy. I frankly have no answers since there are armys of tax accountants and lawyers figuring ways to minimize tax burdens like never before! But one thing that I believe, if it were not for various rents, tax avoidance, and just making things look good artificially and I think a stock buy back is artificial, most companies today would be failing. Certainly this is not good for the economy at large. Certainly all the talk does ZERO for the bottom 80% who actually work for a living. I just can’t help but feel that a reconning is coming for the United States. This country can not run like a 50s central american oligarchy!
So how much of that $2.5T was the U.S. government actually getting before the Trump tax deal? ZERO! So there is nothing to be lost — no ripoff — because the government was never going to get that tax revenue to begin with.
Furthermore, the assumptions of your math wildly screwed up. There has not been a static $2.5T sitting offshore for twelve years. Those overseas balances are cumulative. Twelve years ago it was less than $2.5T and today it might be more. Nor would that $2.5T be taxable at 35%. The outgoing repatriation tax laws required companies to pay corporate taxes over what they had already paid the countries where the profits were earned. For example, if a company earned $10B in Buenaventura and paid 10% ($1B) to Buenaventura, it would have owed the U.S. only 25% ($2.5B) if the company moved those dollars to the U.S.
I think your missing the point. 1. Is that repatriation a net gain seeing the huge cuts given to the 1% and Corporations. 2. So what, other than a big time dump to the bottom line what does it do for me or any other person who works for a living? Also a lot of this money was not anywhere to begin with, it was right here in the dear US of A in a bank account. All they did was move it from one account for their off shore subsidiary and move it to one onshore? That is what is so incredibly infuriating about all of this. We need to get a lot less of this sort of loop hole nonsense and put a lot and I do mean a lot Tax accountants and Tax Attorneys out of work.
Repatriation is a huge net gain for the American economy. For the last 21 years I have worked in accounting and finance for one of the world’s largest banks and I can tell you that your understanding of how money moves between affiliated legal vehicles located in different countries is not correct.
What was infuriating was the former tax law. It wasn’t a loophole that allowed companies to hold earnings overseas, it was stupid tax policy that punished them for bringing foreign earnings home. The U.S. was the only developed country in the world to attempt something so asinine.
BTW, I’m with you about killing off loopholes. The tax code should be so simple a 4th grader could file a tax return. Tax code complexity only protects those with established wealth who can afford tax accountants and attorneys to protect their money; and complex tax codes are burdensome to small businesses, startups and average wage earners.
Issue is we’re at the start of a Boom not a Recession. One reason being is the economy has been languishing under Obama under over regulation that really prevented it from recovering from the 2008 recession. Next recession won’t be due until well after the next POTUS election cycle, so closer to 2024 unless something big happens that quakes the economy.
Bob said we’ve gone 8 years without a recession and you say “we’re at the start of a Boom not a Recession”. With the government’s ability to print money, boom or recession, all we know for sure is that either way, we can be assured of a massive misallocation of available resources.
@TemporalBeing That’s cute that you think the next cycle isn’t until 2024. There’s one in the middle that matters and could throw a wrench in your plan…
Boom eh? You mean like the Kansas boom right?
A la espera de como continua el año, seguro que para mejor, eso esta claro.