Drop tax on foreign-earned income; see U.S. economy bloom

San Jose Mercury News | The news can’t seem to keep pace with the economic cataclysm. The daily barrage of companies announcing job cuts, plant closings and credit freezes has no apparent end. We have become numb to the magnitude and number of layoffs. Laypeople and politicians alike seem bewildered and have convinced themselves that not only is the government responsible for pulling us out of this mess — but it also knows the best way to do it.

Business leaders like me don’t necessarily agree with this conventional thinking. We believe the responsibility for beating this recession lies with us. So, don’t ask for a handout. Use that hand to reach into your back pocket and stop the financial insanity that we are currently experiencing.

Roughly a half–trillion dollars is sitting overseas in the foreign subsidiaries of U.S. companies. That’s right — good old-fashioned cash — the antidote to our current widespread plague. A study conducted by economist Allen Sinai for the American Council for Capital Formation found that $545 billion in foreign-earned income could be attracted back to the United States. Since many tech companies make half or more of their sales overseas, repatriation is a top priority of the Silicon Valley Leadership Group.

So, what’s the problem? Our government imposes a 35 percent tax on income earned overseas that U.S. multinational companies must pay to bring the money back home. Without a doubt, the government could use that tax revenue right now. But companies can never expect to earn a return higher than the tax; so the money stays away, and will continue to stay away. And unfortunately, this translates into continued reductions in the U.S. work force. By lowering that tax temporarily, Congress can entice companies to repatriate those earnings. The capital will flow into U.S. financial institutions, investments in U.S. plants and equipment, and into the federal treasury.

Drastic times call for measures that work — now. Provide a 90-day window to repatriate the money that companies have already earned. History validates a repatriation incentive. When the tax was cut to 5.25 percent in 2004, U.S. companies repatriated $300 billion — about twice the forecast. About a quarter of the funds went to capital investments, and a quarter to hiring and training of U.S. employees. Sound good so far?

Sinai estimates that lowering the tax can: boost the U.S. GDP over a period of several years, peaking at an added $110 billion in 2010; spur capital investments worth $280 billion over a five-year period; increase R&D spending by $7 billion a year for five years; and contribute to job creation or, at the very least, stem job loss, with a maximum of 614,000 jobs created by 2011.

All of this — and we don’t need to print more money, go into debt or rob taxpayers to do it. If the government is truly interested in helping — this is a game changer. Oh, and we, the businesses that have repatriated the cash back into the U.S. economy, will also let you know where all the money went — providing transparency and accountability to show how the capital was used. The government is earning 0 percent on this overseas income today — because it’s too costly to bring it across the border. Offering a repatriation tax cut would actually bring tax revenue to the U.S. for a boat load of money that’s sitting out in international waters waiting to dock.

Repatriation without taxation. Untie our hands, let us put the laid-off workers back to work and let America’s businesses help solve this crisis. This is not a difficult decision. Make it and let’s get back to work at making America great.

Michael Klayko is chief executive of Brocade Communications Systems and a board member of the Silicon Valley Leadership Group. He wrote this article for the Mercury News.