WSJ Report: Profitable Corporations Keep Cash Abroad

rather than pay 35% US corporate profit tax.  Sometimes the result is US corporations borrow money in the US in order to pay their bills, including taxes, because interest is tax-deductible.  Rather than continue the current system, which creates a perverse incentive to keep capital outside the US in hopes of the next tax holiday which would allow its repatriation at lower rates, we need to establish a regular system that permits corporations to repatriate money at more reasonable tax rates if that cash is invested for a public purpose.  This is what the InfraBank Project endeavors to do:  allow corporations to pay just 15% corporate profit tax on InfraBank five-year CDs, with all principal and interest returned at the end of that period as non-reportable income, in other words, tax-free.

here’s the link to the WSJ

Would InfraBank Bonds Pay Off?

A couple of interlocutors have raised the question whether InfraBank bonds could be paid off within their five-year timeframes given the long-term nature of the investments they would fund.  Would the bank not just be a “legitimized ponzi scheme”?  Although the rating agencies have made mistakes in the recent past, it might be worth noting that Fitch recently gave an ‘A’ rating to the South Carolina Infrastructure Bank (http://www.reuters.com/article/2012/10/01/idUSWNA654520121001?type=marketsNews).  Traditionally, municipal bond investments are among the safest possible.  For the 40% of InfraBank projects in the municipal bond-type investment field, presumably there would be a low risk of default.  And the InfraBank would be no more or less a ponzi scheme than is a savings bank that takes in deposits and funds mortgages; in both cases, new money together with payments fund payoffs of earlier deposits.  The other 40% of the portfolio, in emerging technologies, would be riskier and similarly long-term.  But the bank would not offer R&D financing.  Rather, it would try to provide funding for new technologies as demonstration or initial scale up projects — in the space between the garage (start up) and the Initial Public Offering (IPO), sometimes called the financial desert.  Some of these projects, in which the InfraBank would take a significant but not sole source financing position, would inevitably fail.  Others would succeed spectacularly.  On balance, the bank should profit.

Doesn’t Venture Capital Do This Already?

For new technology projects, The InfraBank would operate in the U.S. similar to the way the International Finance Corporation of the World Bank (IBRD) functions: it would make loans to private corporations seeking funding to scale up a new technology. Like the IFC, it would take a significant position in the loans, but would avoid being the sole source of funding, as doing so would both expose it to a high level of risk and potentially distort the market. One comment offered by private equity interlocutors is that while there is plenty of money for new technology, most private equity is leery of unproven ideas. On the renewable energy side, for example, there is no shortage of emerging technologies. But an uncertain policy environment together with the predictable fact that not all good ideas will utimately prove profitable inhibits investment in some of the newest and possibly most destabilizing ideas. Private equity wants to get in on the ground floor when it is fairly sure the outcome will be profitable. The result is inventors I have spoken with who cannot get financing to scale up a promising demonstration project and private equity professionals who say there is an avid market for those who can spot early the Next Big Thing. An InfraBank investment in this environment could serve as a catalyst that gets both parties off their stuck position and moves the needle forward.

What’s wrong with this idea?

Political gridlock in Washington blocks agreement on matters large and small.  Meanwhile, the economy limps along four years after the crash of 2008.  To the extent there is any discussion of more spending, it tends to be an argument between guns and butter — both short/medium term concerns.  Investment in the future:  roads, bridges, schools, efficient electrical grids, widespread broadband, emerging energy and bio-technologies is considered desirable but impossible without more debt, which the nation cannot afford.  And yet these are the kinds of investments that will put people to work, grow the economy and prepare a brighter future for all.

Is there a way to invest in the future that could appeal to both the political right and the political left, could benefit both people and corporations, grow the economy and put more people to work while increasing both tax revenue and consumption but not add to the national debt?