Wall Street Sees a Windfall, as Washington Works Out the Details
Wall Street can’t wait to get its hands on some of the $2.5-T cash pile that US companies have stashed overseas.
Neither can Washington.
In fact, a revenue-raising proposal by President Elect Donald Trump is what focused investors’ attention on the hoard of foreign cash.
Donald Trump is proposing a 1 time 10% tax on corporations’ accumulated foreign profits. Under current law, the money goes un-taxed until a company wants to repatriate it to America, and then it’s hit with the normal corporate rate of 35%.
After paying the 1-time tax, companies will be free to use the money however they wish.
Goldman Sachs (NYSE:GS) estimates that companies in the Standard & Poor’s 500 index will bring home $200-B of cash in Y 2017 and use $150-B on share buy backs.
That will drive a 30% increase in share repurchases, Goldman says. Optimism about that cash has helped push stock prices to record levels since the Donald Trump’s election.
Before companies can spend the money, though, Washington must agree on what to do with its cut. The 10% tax has been discussed as a way to fund Donald Trump’s infrastructure plan, an idea that has bi-partisan appeal.
President Elect Trump has vowed a sweeping tax reform that would cut the top corporate rate to 15%. The repatriated-profits tax is one of the few big sources of money to help pay for the tax rate reduction.
One thing we should not expect is any economic boost from corporations bringing their money home.
That was the hope in Y 2004 when Congress passed a tax “holiday,” letting corporations pay a temporary 5% rate on money they repatriated.
The tax Holiday was part of the American Jobs Creation Act, but the jobs were a mirage.
Companies spent the cash on acquisitions, dividends and stock repurchases, and some of the biggest beneficiaries employed fewer people 2 years later.
The current proposal is a mandatory tax, not a voluntary Holiday, but the effects could be similar.
“That money is likely to go to buybacks and mergers,” says the director of federal tax policy at the liberal Center on Budget and Policy Priorities. “We shouldn’t be under any illusion that it is going to lead to some sort of uptick in investment.”
Wall Street is fine with that, but it may be getting ahead of itself in anticipating a quick infusion of cash.
The tax proposals being put forward by both President Elect Trump and GOP Congressional leaders are the most ambitious in decades, and the details are not yet in place.
Wall Street will be patient, as the Trump Administration works thing out. I believe this will happen.