The tax repatriation holiday . . . a boom for high tech firms but a bust for the economy and jobs?

Posted on June 20, 2011


Think about this for a moment . . . American-based companies who have become global powerhouses because of the tremendous opportunities afforded them by being based in America, invest up to 90% of their money outside of the country as a means of avoiding taxes.  While the Financial Times article indicated that the high tech industry in the US is lobbying the government for a reduction in taxes so that they can bring the money back home to invest in our country, critics point out that when a similar break was granted in 2004 virtually all of the money went to the shareholders versus reinvestment in the country.

from March 21st, 2011 Procurement Insights post From the impact on the automotive industry to the near-term pricing and margin pressure considerations of the high tech sector, coverage of the Japan disaster has been a mixed bag of targeted relevancy

According to an article in today’s New York Times (Companies Push for Tax Break on Foreign Cash), high tech companies such as Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion.

This is not mere pocket change, but represents a sizable war chest that raises an important question in the context of the proposed repatriation holiday, in which the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent.  The question to which I am referring is how much of the 30% windfall that these as well as other companies would realize will ultimately be invested back into the US economy, including key tertiary and quaternary industry sectors?

When I raise the issue of tertiary and quaternary sectors, I am talking about the “three-sector hypothesis of industry” (which has been extended to four with the advent of knowledge-based industries) developed by Colin Clark and Jean Fourastie.  For those unfamiliar with my previous posts on this subject, the hypothesis includes the extraction of raw materials (Primary), manufacturing (Secondary), services (Tertiary) and knowledge-based (Quaternary).

Under a “general pattern of development,” Clark and Fourastie proposed that a wealthy nation has a clear path of progression through each phase. Effectively managing this progression is critical to what Fourastie referenced in his 1949 publication “The Great Hope of the Twentieth Century” as “the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanization of work, and avoidance of unemployment.”

With a growing concern that both the US and Canadian economies risk falling to a third world status based on a continuing over-reliance on the primary and secondary sectors to drive the economy, one cannot help but wonder is the Apples, Googles and Microsofts will do the right thing with their respective windfalls and help stimulate the development of the tertiary and quaternary sectors to keep pace with other countries such as the UK and India.  The track record in this regard, and as pointed out in the opening paragraph of today’s post, is less than glowing.

The fallout of course is that if the current trend in terms of developing (or perhaps updating would be the better word) the North American economy continues, the ripple effect of stagnating employment development and the related narrowing of the revenue flow due to the increased off-shoring of critical jobs will affect all of us, including those of us in the purchasing profession.

So what’s the answer?  Should the proposed repatriation of foreign profits be allowed at the much lower tax rate without a conditional re-investment requirement?  What do you think?


Posted in: Commentary, Economy