Volume 23, No. 4: 2013 Untaxed Foreign Earnings In The S&P 500
Costless stock option compensation. Invisible derivatives assets and obligations. Lending to subprime borrowers, because real estate values never go down; besides, loans can always be packaged and securitized. The irrelevance of earnings and cash flow in internet companies because they will always be able to tap capital markets.
Those are just some of the “good ideas” that happened in finance and on Wall Street over the last twenty years or so. They all seemed foolproof and eternal – until they ended badly. Stock options are costless – until accounting standards change. Derivatives are invisible – until a California county bankrupts itself using them and follow-on accounting reforms put them on corporate balance sheets. Subprime lending? Internet 1.0 companies? All of us know how those turned out.
Financiers and their clients seem to be genetically programmed to find brilliant ideas and execute them – and execute them over and over again until they’re dead. In another ten years, maybe the international tax game will be added to the list of good ideas gone bad. Companies have taken their common-sense efforts to lower their tax bills to extremes, arbitraging their taxes by putting low-profit, high cost operations in countries with high tax rates and high-profit, low cost operations in countries with low tax rates. Such strategies are rarely well-explained to either shareholders or the public at large, and public opinion has been inflamed by the loss of jobs to low-tax countries. (Maybe public opinion is inflamed more by jealousy.) Regardless, it’s a game that can’t last forever because governments keep losing revenues while still providing services – and governments can enact reforms and laws to change the dynamics of tax avoidance. In this report, we estimate the significance of untaxed foreign earnings to the earnings and returns of the S&P 500, as a whole and to individual companies within it.