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End This Crazy Tax: It Will Boost the Economy – Cisco Systems, Inc. (CSCO), Apple Inc. (AAPL)

Cisco Systems, Inc. (NASDAQ:CSCO) reported record quarterly earnings last week, and the company now holds $46 billion in cash and short-term investments. That’s great news for Cisco. But it’s not great news for the U.S. economy. After earnings were released, CEO John Chambers told CNBC that until the U.S. tax code changes, Cisco is effectively done acquiring U.S. companies and expanding its domestic workforce.

The reason is that Cisco holds the majority of its cash overseas, and bringing it back to America would mean getting bulldozed by the U.S. tax code. “Wherever we acquire is where our head count growth is going to be,” Chambers said. “If the majority of our money remains outside the U.S., and this depends on tax policies, that’s where you’ll see us acquire going forward.”

Cisco Systems, Inc. (NASDAQ:CSCO)Here’s the skinny. If an American company earns profit in another country, it has to pay that country’s income taxes. But if it then chooses to bring that cash back to America, it owes U.S. taxes, minus a credit for foreign taxes already paid. So imagine Cisco earns $1 billion profit in Switzerland. It will owe Switzerland’s 8.5% corporate tax. But if Cisco then brings the remaining $915 million back to the U.S. to pay dividends or expand its workforce, it will owe another 26.5% to the IRS — the difference between Switzerland’s 8.5% tax rate and America’s 35% rate. It’s called the repatriation tax.

Cisco’s other option is to keep the money in Switzerland (or whatever country it earns overseas profit in). Not surprisingly, that’s what most global corporations choose to do. As of last March, U.S. companies held about $1.2 trillion in total cash. But almost 60% of that was sitting in foreign bank accounts, according to Moody’s. Some companies hold the vast majority of their loot abroad. About 80% of Oracle Corporation (NASDAQ:ORCL)‘s cash is held overseas. Apple Inc. (NASDAQ:AAPL) holds close to 70% of its cash outside the U.S.

There are two crazy things about the repatriation tax. The first is that it doesn’t raise much money for the U.S. Treasury. Using the most bearish assumptions, The Joint Tax Committee estimates that ending the repatriation tax altogether would raise deficits by about $8 billion per year — a rounding error measured against $2.9 trillion in total revenue. A separate estimate from the Congressional Budget Office shows that ending repatriation taxes would actually raise federal tax revenue, since companies would likely bring more cash home to pay dividends, which are then taxed. Either way, repatriation taxes have a trivial impact on the federal budget.

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