Tech giants likely to offer stock buybacks, hike dividends if given a tax break on billions in profits they hold overseas, economists say.
The nation’s high-flying tech giants would get a huge windfall under the Republican tax plan, but economists say the companies are more likely to reward shareholders with dividend hikes and stock buybacks than in directly creating U. S. jobs.
A plan approved by the House, and a separate proposal before the Senate, both lower tax rates on foreign profits that subsidiaries of U. S. companies bring home.
A significant portion of the $2.5 trillion or so that U. S. companies hold offshore belongs to high-tech firms. Apple Inc. alone held $252 billion overseas at the end of September and, by one estimate, would get a $47.1 billion tax break under the House plan.
Other high-tech companies like Facebook, Amazon, Cisco, Oracle, Microsoft, and Google parent Alphabet would also would reap a combined total of tens of billions in tax breaks.
“I don’t really think this is going to have much of an impact on jobs in the United States,” said Eric Toder, an economist and co-director of the Tax Policy Center, jointly run by the center-left think tank Brookings Institution and the centrist Urban Institute.
The White House offers an opposing view, maintaining the plan would lead to more jobs and production in the United States.
If the reform lands on President Donald Trump’s desk for signing, it will “bring back trillions of dollars in American wealth that is currently parked overseas—money that can be used to invest in America’s workers and American industry,” Treasury Secretary Steven Mnuchin and Gary Cohn, director of the National Economic Council, said in a statement.
History shows that expectations of job creation may be wishful thinking.
And some economists argue that the tax break to bring home offshore cash may actually hurt workers in the long run by depriving the Treasury of full tax receipts.
The tax break “will worsen inequality in the U. S. It will make the superrich… even richer and risk deep cuts to vital programs for working Americans like Medicare,” said Rick Claypool, research director at Public Citizen, a left-leaning advocacy group headquartered in Washington that has criticized the potential windfall for tech giants.
The last major program to repatriate corporate profits from overseas came in 2004 under President George W. Bush. That plan gave corporations a 5.25 percent tax holiday, and a 2011 Senate report says it lured $150 billion back to the mainland.
But rather than create jobs, the report found that the top 15 repatriating companies accelerated stock buybacks, and increased dividends to shareholders. Those 15 companies slashed their overall U. S. workforce by 20,931 jobs, the report found, even as the top five chief executives reaped raises of 27 to 30 percent in the next two years.
The tax windfall under consideration on Capitol Hill carries no stipulations about how corporations spend the tax windfall that may soon come their way.
“I don’t believe right now that the legislation has any controls on how that capital would be used,” said Scott Kessler, director of equity research at CFRA Research, a small independent firm in New York City. Kessler offered what he expected to be priorities for the high-tech companies.
“They could drastically expand their buyback activity, increase the dividend, you know, they could look to fortify manufacturing here in the U. S.,” Kessler said.
When a company repurchases its own shares, it reduces the number of shares held by the public, in theory increasing the value of each outstanding share and pushing stock prices up.
If high-tech companies undertake such moves, it could ramp their surging stock prices even higher. Apple, the world’s most valuable company, currently has a market capitalization of $878 billion. The market capitalization of other high-tech companies with overseas cash hoards include Alphabet ($720 billion), Microsoft ($642 billion), Amazon ($548 billion), Oracle ($205 billion) and Cisco Systems ($177 billion).
Apple chief executive Tim Cook said tax changes are “sorely needed” to end a current system that requires U. S. corporations to pay high U. S. taxes (after subtracting tax they’ve paid to the foreign governments where their overseas affiliates operate) upon repatriating profits.
“This is kind of a crazy thing to do. So what do people do? They don’t bring it to the United States,” Cook told Lester Holt of NBC News earlier this month. “This needs to be fixed.”
Some economists see a salutary benefit to the tax reform on overseas profits even if companies spend their windfalls on shareholders rather than on expanding U. S. production.
“There’s a lot of people who say this will only benefit the wealthy. That may be true. But these people tend to reinvest.… They are not taking that money and buying Porsches with it,” said Gavin Ekins, research economist at the Tax Foundation, a pro-growth tax policy group headquartered in Washington.
Describing the affected assets as offshore or overseas is a bit of a misnomer.
“They could be in U. S. banks (although) they are considered to be assets of the foreign affiliate,” Toder said. “As far as the bank is concerned, Apple Ireland and Apple US are the same company.”
High-tech and pharmaceutical firms would be most helped by the tax reform since they make goods with lots of intellectual property value that can be priced rather flexibly.
The tax code revamp will also change the equation for how multinational firms book the prices their related companies charge each other. It’s a fairly straightforward process for manufacturers that make parts overseas, say General Motors or John Deere & Co. But Toder said Apple can transfer patents and know-how to foreign affiliates, such as in Ireland, and then juggle profits between U. S. and its Irish affiliate without affecting shareholders.
“So what you’re really doing is, for not much profits by the U. S. company, you’re creating this great opportunity for the Irish company to make profits” in low-tax Ireland, Toder said.
