Commentary
10/24/2010
09:32 PM
Bob Evans
Bob Evans
Commentary

Global CIO: Oracle And Cisco Join Forces On $1-Trillion Idea

Their new plan could create 2 million private-sector American jobs, add $50 billion to the federal treasury, and trigger new investment in the U.S.



Proving that politics makes for strange bedfellows, Cisco and Oracle have publicly pitched to President Obama a proposal that would let create 2 million new private-sector jobs at no cost to the federal government by allowing U.S. corporations to repatriate about $1 trillion in foreign earnings without incurring brutal tax rates of up to 35% that are currently keeping that money locked out of the U.S.

Cisco CEO John Chambers and Oracle president Safra Catz recently penned an op-ed piece in the Wall Street Journal saying that current U.S. tax law is spurring global corporations like theirs to hold their vast hordes of foreign earnings in their subsidiaries outside the U.S., and to invest some of those riches in almost any country in the world except the United States, where doing so would trigger massive tax bills.

Unwilling to pay those excessive U.S. tariffs when talent and opportunity abound in countries around the globe, corporations are choosing instead to pursue the best legal interests of their shareholders by keeping that trillion-dollar bounty outside of this country and pumping it into economies whose corporate tax policies are vastly more attractive than those of the United States.

From the Journal article bylined by Chambers and Catz: "The U.S. government's treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few.

"Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That's because those countries realize that choking off foreign capital from their economies is decidedly against their national interests," write Chambers and Catz.

The imbalance between U.S. corporate tax policy on foreign earnings and the policies of other developed countries is so great, Chambers and Catz write, that it would border on irresponsibility for corporate executives to bring that money into the U.S. at a cost of up to 35% when so many more-attractive options exist outside this country.

"Many commentators have pointed to the large cash balances sitting on U.S. corporate books as evidence that the economy is still stalled because companies aren't spending," they write. "That analysis misses the point. Large cash balances remain on U.S. corporate books because U.S. companies can't spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability.

"Especially with corporate bond rates falling below 4%, it's hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40%," say Chambers and Catz.

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But by dropping that brutal rate to, say, 5%, Congress could trigger in this country a windfall in corporate investment in R&D, equipment purchases, new facilities, and hiring while also raising $50 billion in federal tax revenue.

As they say in New York, what's not to like? Consider this scenario:

"The amount of corporate cash that would come flooding into the country could be larger than the entire federal stimulus package, and it could be used for creating jobs, investing in research, building plants, purchasing equipment, and other uses," write Chambers and Catz.

"It could also provide needed stability for the equity markets because companies would expand their activity in mergers and acquisitions, and would pay dividends or buy back stock. And when markets go up, confidence increases and businesses and consumers begin to spend."

And just how do Chambers and Catz propose to ignite the creation of those 2 million private-sector jobs? "The $50 billion boost in federal tax revenue, meanwhile, could be used to help put America back to work," they write.

"For example, Congress could use it to give employers—large or small—a refundable tax credit for hiring previously unemployed workers (including recent graduates). The tax credit could equal up to 50% of a worker's first-year and second-year wages, capped at $12,500 per year (or $25,000 total per new hire)."

It's an intriguing proposal for many reasons:

  • First, any move away from the current confiscatory policies is a good thing, almost regardless of the details, so just the fact that Chambers and Catz have sparked a discussion on this vital topic is a very good thing.

  • Second, they are describing a "stimulus plan" stemming not from the federal government but rather based within the private sector, which has always been the engine of real and enduring job growth within this country and throughout the world.

  • For those who believe that the federal government is somehow "entitled" to its cut of corporate profits, the Chambers-Catz plan calls for a $50-billion windfall, which is $50 billion more than the government will get if it chooses to maintain its current policy. Look again at the line from Catz and Chambers on alternatives that corporations currently have: "Especially with corporate bond rates falling below 4%, it's hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40%."

  • Their plan focuses intensely on issues of real growth, versus the hypothetical kind that have kept unemployment near 10% for far too long: huge portions of those repatriated earnings would be plowed into "creating jobs, investing in research, building plants, purchasing equipment" and would also "provide needed stability for the equity markets."

    In addition, it's particularly interesting to see consider the personalities behind this proposal: on the one hand there's Chambers, the longtime and highly visible Cisco CEO who's not only the well-known and highly respected public face of his company, but also someone who's spoken out on a number of occasions about our current federal tax laws and their adverse impact on the U.S. economy.

    On the other hand is Catz, the Oracle president who wields enormous influence within the company that's dominated by Larry Ellison's celebrity persona but who has generally kept an extremely low profile outside the company.

    It's good to see Catz not only venturing into the public eye but also doing so with Chambers, whose leadership of Cisco over its 15 years of extraordinary growth have cemented for him a reputation as one of the most-successful and most-admired CEOs on the global stage.

    I say it's "good" to see that pairing for Catz because while this industry wields vast influence in the private sector, it sometimes feels underrepresented in the realm of public policy and can use more—many more—credible, accomplished, innovative, and confident thinkers in advocating for public policy that allows the IT industry to do well for its shareholders and for the country that, at least so far, still houses most of its leading corporations.

    The Chambers-Catz plan will help the United States retain that position, while the current policy on foreign-earnings repatriation will only give U.S. corporations more incentive to push more jobs and investment and opportunity overseas.

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    GlobalCIO Bob Evans is senior VP and director of InformationWeek's Global CIO unit.

    To find out more about Bob Evans, please visit his page.

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