In his state of the union address last night President Obama urged U.S companies to repatriate all those profits hiding off-shore and away from the prying eyes of the IRS. Ed Mills, Managing Director at FBR Capital Markets summed it up in his morning note:
The President called on Congress to close tax loopholes and use the savings to fund spending on infrastructure such as ports, bridges, rail, and fast Internet. The President’s call for corporate tax reform did not include specifics, but we believe wholesale tax reform is unlikely this Congress. However, we think the President’s discussion of encouraging companies to invest in America instead of keeping profits abroad could be a “soft opening” for a tax holiday for the repatriation of offshore corporate profits.
Mills told Yahoo Finance’s Jeff Macke, “There’s been key opposition who’s finally retired and you have a republican congress who is generally favorable towards tax cuts.”
While a Democratic President and a Republican congress continues to be a recipe for gridlock Mills sees at least a glimmer of hope. “If you can take the money that’s coming back in [from tax reform]...and then you invest that in infrastructure instead of putting it back into the general fund, that gets democrats on board, that gets people working and that’s where we can see the economic growth both parties want to see.”
Mills also thinks pairing corporate tax reform with a minimum tax on foreign earnings of around 10% could give legislators on both sides of the aisle a reason to reach across. “On foreign earnings set a minimum at 10%. I think a lot of people could live with that and the exchange for getting that minimum down to 10% - and you get to net out whatever you pay in that jurisdiction - is that as soon as you pay it in the year in which you earn it, you can repatriate that back to the united states for no additional cost.”
Still, he admits, none of this is particularly likely this year. Mills notes that Congress acts under crisis or deadline and little else. Tax reform simply doesn’t fit the bill yet. That won’t stop the Obama administration from trying. “We have a deadline coming up later this year on some of the other tax extenders that expired last year so that’s what the admin is hoping that they can use that deadline as a possible moment, but we really don’t have a crisis yet.”
With the economic crisis seemingly safe in the rear view, Mills notes that President Obama would love to add tax reform and infrastructure to his legacy. If he can get that done in one negotiation, so much the better. Whether a Republican Congress will allow such a development in the next two years remains to be seen.
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