Sunday, February 01, 2009

Repatriating Foreign Profits

There are two obvious things about this stimulus package – since America is short on her own cash, all bailout money is ‘borrowed’ and there is realization that ‘tax cuts’ are one of the best ways to stimulate economy when those tax cuts are targeted. Most Liberals, including this blogger, find it hard to accept that tax cuts are useful. But CBO, the same organization Peter Orszag headed previously, came out saying in clear terms that tax cuts do help to percolate the money. The disbelief on tax cuts is because in early 2008 whatever tax cut was passed under Bush; it did not help much other than simply moving recession from Spring of 2008 to Fall of 2008. Temporary personal tax rebates in earlier period, around 2002, passed by Bush did not make any perceptible difference apart from increasing the deficit. Though Bush’s larger tax cuts to business and Capital Gain tax cuts (which will expire by 2010) have been controversial and definitely anti-egalitarian; there can be some merit that those would have helped businesses to grow over years.

Point is ‘tax cut as stimulus’ is quite an ambiguous issue, let us say as ambiguous as like any other stimulus measure. The politics of the bailout is such that, Obama himself has been saying at least 40% of bailout money will be used for tax cuts. Naturally, substantial portion of that will go to those down in the economic ladder since every additional dollar will be quickly spent by those folks. The remaining part will be for business tax cuts. There will be many competing ideas for this pie of business tax cuts.

One idea, propounded by my employer Mr. Michael Klayko (CEO, Brocade Communications System, Inc.) in his San Jose Mercury News Op-Ed is tax cuts on repatriation of profits earned by American MNCs outside of America. He sites two supporting arguments:
- Study by economist Allen Sinai (stars of who are on rise in policy debates these days) saying almost $545 Billion can be brought in by American companies and
- One such earlier limited tax cut in 2004 under Bush did bring in around $300 Billion.

The key differentiator is Mr. Klayko is ready to suggest and adopt transparency about how the amount will be spend in America to sustain, create jobs and to undertake R&D. Mr. Klayko has credibility in this regard. Brocade became infamous due to its earlier CEO Mr. Rays who landed the company in the mess of Options Back Dating Scandal. Mr. Klayko cleaned the mess and instituted needed systems to steer clear of this legal morass. He followed through Brocade’s two acquisitions in cleaner manner. Internally, Mr. Klayko has made all the efforts to institutionalize ‘play by the rules’. I would not be in the position to comment on his business performance that is for business analysts, Wall Street and learned investors to comment about. In any case that is bit of besides the point. But his performance on ‘corporate governance’ side has been positive. Hence merit and credibility when he says Tech Industry would make efforts to bring transparency in how these repatriated profits are used. When generally CEOs and industry leadership are in flunk all across America, it is important that credible CEOs and industry leadership step forward to meet our challenges.

One can argue that as a non-executive employee there would be limit to my information. That is true. One can also argue that Mr. Klayko being my employer, I am carrying the waters here. Again, questions about my motivations can not be fully answered here too unless folks are ready believe. But at the end of the day fact remains that for American Public, to consider and to pursue this tax cut proposal is beneficial. We all debate policy details because it is beneficial to all of us. There is no ‘conflict of interest’ when the interest is larger public good; else public discourse is hard to pursue. Enough said on that.

Coming back to Mr. Klayko’s tax cut proposal, the real attractive point of ths proposal is it highlights the importance of America remaining pro-globalization economy. As is clear from the proposed provision of ‘consuming strictly American produced goods only’ making way into the Obama Stimulus package; winds of protectionism are gathering strengths. Short term, trade protectionism could help; but Americans and especially our Congress members with Pavlovian proclivity towards Protectionism need to know global trade can help America in crisis in bringing cash too. If America adopts trade barriers, there will be no sale of American goods outside America and there will be no profit to bring back. No one is advocating that America becomes completely export driven economy like Germany, Japan or China. We know how lopsided consumption patterns create global imbalances. But that does not mean we go total gung-ho on domestic consumption only and not bother about what happens out side America.

Tech Industry is one of the few industries in America which is relatively in better position than other industries. When every other industry is making pilgrimage to Congress for industry specific handouts, Tech guys are not part to that melee. An encouraging tax policy along with partnership with Government will help Tech Industry to join these nation building times in sensible, effective and honorable way.

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