Obama's budget packs HUGE tax breaks for poor widdle tech giants

Only the little people pay taxes – you don't get rich cutting checks to the IRS

President Obama's budget for 2016 includes a whopping tax break that US tech giants have been demanding – because it will let them bring trillions of dollars held in offshore accounts to America without running up huge bills.

Under today's tax code, companies that earn money overseas must pay 35 per cent to Uncle Sam if they want to bring the money into the US and spend it. As a result there are an estimated $2tn sitting in bank accounts that firms are unwilling to bring home and pay tax on.

In his budget to Congress, Obama proposes that the tax on foreign income be reduced to 19 per cent to encourage repatriation of funds. In addition he wants a special "one-off" tax holiday where firms would pay 14 per cent to the IRS.

"The Budget would devote the one-time revenue from this toll charge to the Highway Trust Fund, financing the President's six-year Surface Transportation Reauthorization proposal," the document states.

"Devoting one-time transition revenue to infrastructure investments is both pro-growth and fiscally responsible, since  - unlike using this temporary revenue for permanent tax cuts or spending increases  -  devoting it to one-time investments will not increase long-term deficits."

Here we go again

You may remember hearing this "one-off" argument before. In 2004 the then-President Bush authorized the Homeland Investment Act, allowing firms to bring their overseas funds to America with a 5.25 per cent tax rate.

It was argued this would give US enterprises the opportunity to invest in factories in the Land of the Free and spur millions of new jobs. That didn't happen.

Instead, a 2008 study [PDF] by the National Bureau of Economic Research found that of the $362bn that was repatriated to the US, more than 90 per cent of those funds went straight back to shareholders in either dividend payments or share repurchasing schemes that increased the value of their stock.

HP returned $14.5bn under the 2004 plan and spent the next two years cutting its US headcount by more than 14,000, while management gave themselves huge bonuses, increased dividends and repurchased shares.

Dell did spend some of the $4bn it brought into the country on job creation, investing $100m in a new manufacturing plant in Winston-Salem, North Carolina. It also splashed $2bn on a share repurchasing scheme that lifted the value of its stock.

But, you might argue, these hardworking US companies are getting taxed already on the earnings they make overseas. Why should Uncle Sam extract another pound of flesh from their bleeding carcasses?

The fact is companies have become adept at minimizing local taxes by funneling funds through subsidiary operations in the Netherlands, Ireland, Luxembourg, and Singapore. All of this is perfectly legal, but does lead to some ludicrous situations.

Take Facebook in the UK, for example. In 2012 the social network paid no corporation tax in Blighty, and the following year it did offer up £3,169, but luckily had tax credits of £182,027 to offset against this.

An analysis by the Financial Times last year showed seven tech firms banked £15bn ($22bn) in sales from British buyers in 2012, but paid just £54m ($81m) in corporation taxes. The situation has got so bad that the UK's Conservative Chancellor of the Exchequer has instituted a "Google Tax" on just these kinds of shenanigans.

At least Obama's somewhat realistic, his opponents won't be

Obama's proposal does at least have the virtue of not trying to sell this kind of a tax break as a job creation scheme. Instead, it's asking for what he thinks he can get from the corporate sector, and has earmarked the money for infrastructure investment.

That in itself is a climbdown. By offering a 21 per cent temporary tax cut, and a 16 per cent permanent cut, the president thinks he can woo US firms into at least handing over some of their billions. But even that largess isn’t going to stand.

Bear in mind Obama's only the executive branch, and the US Congress is now firmly Republican Party territory. By the time the budgetary horse-trading is done that tax rate is likely to fall a lot closer to the 5.25 per cent figure used previously to bring back foreign earnings.

The argument will be that returning this money to shareholders will stimulate investment and thus benefit us all. If that's the case, given the last 30 years of such trickle-down thinking being reflected in ever lower tax policy, we should be in the middle of an economic boom the like of which humanity has never before seen. How does that look to you?

Firms like Apple, Google, Cisco and others are very keen for see repatriation of funds, but aren't going to do it until the tax rate is right – in 2013 Tim Cook said he thought a single-figure tax rate would be fair, and saw no problems telling Congress that that's what he was holding out for.

This is a little galling for the rest of us in America who are filling out our tax returns to hear such talk. The person on the street can't dictate how much tax they are prepared to pay in such circumstances. Maybe the late and little lamented Leona Helmsley was right – "Only the little people pay taxes." ®