December 28, 2016 / 4:07 PM / a year ago

U.S. company cash deluge will lift only some boats

NEW YORK (Reuters Breakingviews) - American companies will give new meaning to cash flow in 2017. The chances of sharply lower U.S. corporate tax rates have gone up with Republicans in control of the White House and both chambers of Congress. Such a change would probably lead to a tide of dollars coming home.

Actor Larry Hagman who played "J.R. Ewing" on television series "Dallas" throws fake dollars notes during a photocall at the 50th Monte Carlo television festival in Monaco June 8, 2010 REUTERS/Eric Gaillard

Overseas corporate earnings aren’t taxed in the United States until they’re officially repatriated. That means large sums are considered permanently reinvested in foreign countries. The most commonly cited figure is about $2.5 trillion for companies in the S&P 500 Index. Equipment, inventory and the like account for much of it. Some $1 trillion is in cash and easy-to-sell securities, according to estimates by equity strategists at Morgan Stanley.

During his presidential campaign, Donald Trump suggested a tax holiday enabling cash to be brought back at a 10 percent rate. Such one-off breaks create perverse incentives to move income overseas and wait for another amnesty. Better is something like the plan backed by President Barack Obama and proposed in Congress in 2014 that sought to tax previous foreign earnings at a lower rate while introducing a new territorial system to curb cross-border sleight of hand.

Politicians and chief executives talk about repatriated cash being deployed to create American jobs and build factories. In reality, shareholders will benefit the most, at least in the short term. Many of the big companies that lobbied for the last tax holiday in 2004 wound up piling the funds into stock buybacks while shrinking their U.S. workforces. Employers invest in factories, research and hiring in response to perceived demand, not because of a government-prescribed windfall.

Of the $2.3 trillion of cash Goldman Sachs analysts expect companies to use this year, about 40 percent will go to capital expenditures and R&D. Assume those two buckets grow roughly in line with GDP, and very little new money that makes its way back to U.S. shores will be dropped into them.

Instead, share repurchases, already at record-high volumes and potentially elevated valuations, will see big increases. Big-eyed CEOs also can be expected to use their tax bonanzas for shopping sprees. According to Thomson Reuters data, cash in mergers and acquisitions by American buyers peaked at 59 percent in 2007, right before the financial crash. The cash flood will lift some boats, but could well sink others.

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