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What if the U.S. taxed companies’ foreign cash – and nobody complained?

ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day.

President Obama outlined a new policy Tuesday that would install a minimum tax on foreign cash holdings. We may be witnessing a historic event: The first ever punitive tax that is welcomed by U.S. CEOs.

The Federal Reserve calculates that U.S. companies currently hold $1.7-trillion (U.S.) in cash and marketable securities, and Moody's adds that more than 55 per cent of this hoard is held outside the United States. Current corporate tax laws stipulate that U.S. companies do not have to pay the usual 35 per cent tax rate until these funds are moved back into the country. So, the funds will be invested elsewhere – surprise! – until the laws are changed.

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President Obama's proposal is actually two-fold: A minimum tax on foreign holdings, but one that will be partially offset by reduced corporate taxes on funds invested domestically. His goal with this proposal is to spark the creation of more jobs for Americans.

Our suspicion is that, while they will never say it publicly, corporate CEOs are actually content with the president's idea. For one, the new policy would provide an excuse to invest in places where 20 hour flights aren't necessary for executives – one of many logistical hassles that are under-emphasized. Anecdotal evidence suggests that flights from L.A. and New York to Shanghai have caused an upswing in sales of the prescription anti-anxiety drug Ativan, which is used habitually by executives to temporarily self-lobotomize on long flights.

General Electric's announcement on Wednesday that it will use the proceeds of its sale of NBCUniversal to buy back shares highlights the other major CEO dilemma, namely that they have no idea what to do with their cash. Recent IMF statistics estimate that developed-world economies are currently operating about four per cent below their potential, so the benefit of investment in more production capacity is minimal at best. Even in the health-care industries, where an aging population is increasing demand across the board, government spending cuts are forcing prices down and lowering the benefits of investing in research and development.

CEOs' compensation is determined by their companies' profitability, so perhaps it's a stretch to suggest that they would be happy about higher taxes. Nonetheless, the opposition to the president's foreign tax proposal may be more muted than you'd normally expect.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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