NEW YORK (TheStreet) -- This year is the 10-year anniversary of the last U.S. tax holiday, which was passed by Congress and signed by Pres. George W. Bush. It allowed companies to repatriate more than $300 billion in offshore cash at a reduced tax rate. Over 800 companies took advantage.
In the three years that followed, the stock markets soared more than 30%. We need another tax holiday now!
A new tax holiday will continue the current bull run of the market while infusing the U.S. economy with more cash to create jobs, perhaps even prompting an increase in the minimum wage.
Need another reason? Think about the European Union’s investigation, announced Wednesday, to better assess the tax structures of various U.S. companies including Apple (AAPL), Starbucks (SBUX) and others.
I believe the EU's investigation was prompted by the results found in last year's U.S. Senate inquiry, which looked into Apple's overseas tax maneuvering. The Senate's investigation claimed it found evidence Apple paid very little corporate tax on at least $74 million in revenue dating back from 2009.
Although the EU's investigation is being called a "global crackdown," it will first look into possible corruption in the Irish government. This is because U.S. Senate investigators concluded that Apple "exploited a loophole" in Ireland’s tax code.
All told, there is over $2 trillion in untaxed earnings being held overseas by U.S. companies looking for ways to minimize their U.S. tax liabilities.
Instead of "cracking down" on these companies, which are doing their required fiduciary duties to their shareholders, it's time for U.S. lawmakers to legislate another tax holiday to allow these companies to repatriate some of that idle cash and put it to work.
U.S. federal tax rates on corporate taxable income vary from 15% to 35%. In Ireland, it's as low at 12.5%. Apple and Starbucks are being penalized for executing strategies to lesson their tax burden. Why wouldn't they? I don't believe a CFO deserves to hold that title if she/he has ever approached the company's board with overseas tax-saving strategies.
At the end of Apple's fiscal second-quarter (ending in March), Apple had a total of $150.6 billion in cash on the balance sheet. But roughly 88% of that cash or $132.2 billion was held overseas. This is why a company like Apple, which generates $10 billion in profits each quarter, has to go to the debt market to fund its share repurchase program and pay dividends. It makes no sense.
Instead, Apple should be incentivized to bring that cash home and use it to expand its businesses. With so much being made about raising the minimum wage, companies would gladly do it and hire more workers in the process. It would be a nice compromise.
The last tax holiday was passed as part of the American Jobs Creation Act. There would be no better way to celebrate the 10-year anniversary of the last repatriation by invoking another. The "American Affordable Living Act" has a nice ring to it.
The alternative is that companies like Apple, Starbucks, Google (GOOG) and Cisco (CSCO), among others, will keep using cheap debt to build their businesses while (simultaneously) growing their cash balances. U.S. lawmakers need to wakeup and appreciate that the trend is not going to change.
At the same time, investors need to heighten their awareness of the matter. It's important to understand how cash balances impact stock valuations and cash flow projections. The three years after the 2004 repatriation act, the Dow Jones Industrials soared 33%, helped by a total of 843 companies bringing back roughly $312 billion in overseas earnings.
The influx of funds stimulated the economy. Debates will continue as to its merit. Some will continue to oppose the idea. But under the right conditions, including the promise of job creation, it will work.
Investors, meanwhile, should prepare for another 33% jump in the market -- and that's being conservative.
The bigger issue still points to the failures of U.S. corporate tax policies, which is in much-needed reform. There is no reason to believe that areas like Europe, the Cayman Islands, Bermuda, Switzerland and other tax havens can utilize our corporate earnings better than American can. That's the real shame in all of this.
Until there are comprehensive changes, the EU's investigation will be yet another reactionary event to businesses trying to do right by their shareholders.
At the time of publication, the author was long AAPL.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.