Michael Barlow ’11, an investment banker on J.P. Morgan’s media and technology team, coauthored an opinion piece that appears this week in the Huffington Post, tackling two issues facing an increasingly divided U.S. government: student debt and untaxed corporate profits held offshore.
Written with Michael Burns, vice chairman of Lionsgate Entertainment, “Putting Repatriated Funds to Work for American Students” begins with the idea of compromise: “the most common and least practiced word in Washington,” Barlow and Burns write. “Nearly blanket disagreement between Republicans and Democrats is impeding progress on a growing list of critical issues. We propose integrating two such issues frozen in partisan limbo to help solve each other: (1) inflated student debt levels, and (2) American corporations holding profits offshore and untaxed.”
They continue: “Here’s our thinking — let’s incentivize American corporations to repatriate their $2 trillion in earnings accumulated overseas by lowering the tax rate to bring these funds home. Then, use the federal funds generated to help relieve the debt burden on America’s 40 million student borrowers. This would be a double stimulus for the American economy, allowing U.S. corporations to freely invest money at home while alleviating the financial burden on the segment of America’s population that will soon take ownership of our economy.”
Ultimately, the Barlow and Burns’ proposal “is not intended to constrain the flexibility of private enterprises in deployment of the profits they have generated, but rather a quid pro quo in return for a beneficial change in tax structure. This is about affordably educating the student-age population who will soon be required to lead Corporate America — and proving private sector and federal initiatives can work together to provide a holistic stimulus for the demographic… And who knows? If we can work cooperatively to tackle issues like these, maybe we can apply the same enlightened bipartisan thinking to other perennial bogeymen like immigration, national security and healthcare reform.”
At Hobart, Barlow double-majored in economics and political science with a minor in international relations. He was also a member of the basketball team and coordinated multiple community initiatives with the Wounded Warrior Project and Soldiers Angles.
The full article is reprinted below.
Putting Repatriated Funds to Work for American Students
Compromise – it’s both the most common and least practiced word in Washington. Nearly blanket disagreement between Republicans and Democrats is impeding progress on a growing list of critical issues. We propose integrating two such issues frozen in partisan limbo to help solve each other: (1) inflated student debt levels, and (2) American corporations holding profits offshore and untaxed.
Here’s our thinking – let’s incentivize American corporations to repatriate their $2 trillion in earnings accumulated overseas by lowering the tax rate to bring these funds home. Then, use the federal funds generated to help relieve the debt burden on America’s 40 million student borrowers. This would be a double stimulus for the American economy, allowing U.S. corporations to freely invest money at home while alleviating the financial burden on the segment of America’s population that will soon take ownership of our economy.
#1: The rising tide of student debt
The growing disparity in the acquisition of skills, often in the form of college education, is a significant contributor to inequality within and across generations. Richmond Federal Reserve President Jeffrey Lacker recently pointed to the now-record earnings gap between workers with a college degree and those without as proof that America is failing to meet the economy’s growing demand for skilled workers and failing to develop our human capital.
Washington has remained focused on the accessibility of education. This is evidenced by the 2007 revamp of the federal college financial aid program and President Obama’s recent proposal to make two-years of post-secondary education free for all Americans.
But higher education in this country comes with costs, and these costs are getting out of hand. In the past 36 years, the cost of higher education in America has climbed over 1,200% – twice as fast as the cost of medical care according to U.S. Bureau of Labor Statistics. This stands in stark contrast to the stagnation of middle-class wages over that same period. Private coalitions such as Bloomberg Philanthropies are doing all they can to maximize financial aid and grant availability, but Americans have largely been forced to borrow to afford higher education.
According to the Federal Reserve, outstanding student debt has ballooned to more than $1.3 trillion (with $1 trillion in federal government loans). More concerning than the gross amount of student loans is their average delinquency rate of 11.3% – the highest of all debt forms. Not surprisingly, the White House’s latest budget revealed a $22 billion shortfall in the federal student loan program from unpaid and forgiven loans. Unfortunately, this hole will be plugged by taxpayer dollars.
Massive funding shortfalls and outsized delinquency rates call into question not only federal student loan underwriting standards (which are a separate conversation), but also why the American standard for higher education remains a traditional four-year college experience. The requisite debt levels and low credit scores associated with this path offset some of its benefit. We believe any conversation on student debt should be had in tandem with a discussion on more affordable post-secondary educational alternatives (trade schools, for example, which give hands-on technical degrees for a fraction of a traditional college’s price with a comparable impact on future earnings power). Traction with such alternatives would not only stem the rising tide of student debt, but it would also mitigate our country’s ever-increasing cost of education and curb the federal lending relied upon to support the system.
#2: American corporations holding profits offshore and untaxed
Meanwhile, American corporations have accumulated more than $2 trillion (yes, that’s trillion) in profits overseas. That cash is both precluded from direct investment in the American economy and untaxed by the U.S. Government. America’s 35% corporate tax rate incentivizes U.S. companies to keep and invest these funds abroad rather than bringing them home for injection into the U.S. economy. Executives at American tech giants Cisco and Oracle recently wrote that “by permitting companies to repatriate foreign earnings at a low(er) tax rate, Congress and the President could create a privately funded stimulus of up to $1 trillion.”
There has been continued momentum behind getting these trillions in corporate cash put to work on American soil. Last September, former President Bill Clinton called for incentives to repatriate these earnings. Earlier this year, Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) previewed a bi-partisan bill that would allow American corporations to bring home this cash at a steeply discounted 6.5% tax rate. In his latest budget, President Obama outlined a path to repatriate these funds at a 14% rate – which shows willingness for the White House to compromise on the issue.
At the current 35% tax rate, American companies will keep as much of their earnings offshore as possible – translating to minimal incremental tax revenue. We believe there is some intermediate rate at which American companies would bring money back to the U.S. and result in significant, additional federal revenue. Under Obama’s 14% proposal, up to $280 billion in federal revenue could be generated if all foreign profits are repatriated. Under the Paul-Boxer 6.5% proposal, up to $130 billion. If just half of this $2 trillion held abroad is repatriated, the program would generate between $65 and $140 billion based on the range of rates proposed. Not a trivial amount given no taxpayer funds are at stake.
Back in 2004, Congress authorized a repatriation tax holiday similar to the one proposed here. At the time, hundreds of billions of dollars in earnings were being held offshore and there was great hope for domestic investment upon repatriation. However, when $360-plus billion was brought back at a 5.25% tax rate, there was widespread criticism when the repatriated funds were largely used for shareholder distributions and participating companies cut thousands of jobs in the ensuing years. While variables like technology trends and the Great Recession impacted the period after the 2004 tax holiday, there are certainly ways to hedge against negative outcomes so that all stakeholders of participating businesses can benefit from repatriation.
For starters, the government should funnel the billions of federal funds generated via repatriation into immediate debt relief to America’s current student population, providing an economic boost to this cadre of young American spenders. This could take the form of minimizing interest on current loans outstanding and allowing the federal college financial aid program to offer new loans at discounted rates. This relief should be accompanied by smarter student loan underwriting standards and be flexible to include, if not encourage, loans for less traditional forms of post-secondary education such as trade schools.
On top of fresh federal funds flowing into debt relief programs, a secondary stimulus could be spearheaded by the repatriating corporations themselves. Companies could allocate a small percentage of the returned cash to support employee programs that help defray the costs of post-secondary education faced by current employees and their families. Funds would be allocated at the participating companies’ discretion and could be earmarked for anything from assisting current employees in covering student loan payments to helping defray tuition costs for employees currently working towards post-secondary degrees. Companies like Starbucks already have similar programs in place that are widely recognized and appreciated.
To be clear, our proposal is not intended to constrain the flexibility of private enterprises in deployment of the profits they have generated, but rather a quid pro quo in return for a beneficial change in tax structure. This is about affordably educating the student-age population who will soon be required to lead Corporate America – and proving private sector and federal initiatives can work together to provide a holistic stimulus for the demographic.
On a more macro level, there is concern about the moral hazard associated with a repatriation tax holiday, especially since the 2004 holiday was sold as a one-time-only event. As a stand-alone, any repatriation holiday could establish a precedent that erodes the U.S. corporate tax base. Companies would come to expect a once-per-decade tax holiday and be therefore incentivized to maximize profits they account for offshore. This concern can only be addressed by making our idea contingent upon a broader re-write of the corporate tax code – or at the very least incremental aspects related to foreign profit taxation.
It is our government’s job to craft a sustainable corporate tax code that encourages American companies to deploy their funds at home in the U.S. – not perpetuate policies that incentivize offshore cash buildup in anticipation for another “one-time” tax holiday. There has been a blatant inability to compromise on the corporate tax code that has spanned four U. S. Presidencies and nearly 30 years. However, with its ability to boost the economic prospects of this next generation of American leaders, integrating student debt reform into the equation might be just the compromise needed to get the ball rolling.
And who knows? If we can work cooperatively to tackle issues like these, maybe we can apply the same enlightened bipartisan thinking to other perennial bogeymen like immigration, national security and healthcare reform.
The opinions expressed herein are solely those of the authors.