Billionaire investor Carl Icahn has a strong opinion on almost every subject, especially politics. He’s also quite happy to share that opinion with anyone who will listen to or read what he has to say.
Icahn’s comments this week on how to stop future tax-motivated corporate inversions such as the recent Allergan – Pfizer deal are an illustrative case in point. On Monday, Icahn published an open letter in the op-ed section of the New York Times, and in the letter he offered his support for “international tax reform”, or at least the Schumer-Portman framework for international tax reform. The key plank of the new framework, of course, is a huge tax break that reduces the current 35% tax on U.S.-based multinationals when they repatriate their profits back home to only around 8 to 10%.
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Icahn supports legislation giving huge tax break to big companies to motivate them to “repatriate” funds
Icahn begins his op-ed with a backhanded compliment of presidential candidate Hillary Clinton, saying that her proposal to stop corporate inversions with new regulation and imposing an exit tax on firms that choose to leave is a good idea, but “flawed because it fails to fix the underlying problem.”
He goes on to offer an overview of what he see as the best solution to the corporate inversion problem. “Fortunately, there is a very simple and immediately available solution. Senators Chuck Schumer of New York and Rob Portman of Ohio have created a bipartisan framework for international tax reform that is supported by House Speaker Paul D. Ryan and Kevin Brady, the chairman of the Ways and Means Committee. Currently, we tax a company’s foreign earnings at 35 percent when the money is repatriated to the United States. And even though the tax code allows for a deduction based on the tax paid to the country in which it was earned, the overall tax is still much higher than it would be in most other countries. We are one of the few countries in the world that asks our companies to pay a double tax on foreign earnings.”
According to Icahn, it’s really all about the “uncompetitive tax code”. He says that is why companies have not already brought their foreign earnings back to the U.S., resulting in around $2.6 trillion in U.S>. corporate profits being banked in foreign countries.
If you are to believe Icahn, the Schumer-Portman legislation would solve the problem because the firms could repatriate the $2.6 trillion in stranded cash at a new rate of 8% and 10%.
There is no question that some firms would take advantage of this tax break deal to bring fund home for domestic projects, but it also seems likely that many firms would choose to keep and spend some (or even a large portion) of the funds abroad.
In describing the benefits of the proposed new framework, Icahn erroneously assumes that companies would repatriate all of their cash hoards abroad when he says “the tax on repatriated earnings would “yield the United States huge incremental revenue — an estimated $200 billion on the $2.6 trillion now kept overseas — and would allow companies to reinvest the nontaxed portion in the United States, creating thousands of jobs. The Schumer-Portman framework also includes provisions that would stop “earnings stripping,” a method a company uses, once it leaves the country, to reduce the tax it pays on its remaining United States-based subsidiary.”