Tags: Fed | banks | US | tax

2 Things That Would Really Get the Economy Going

By    |   Monday, 28 April 2014 08:07 AM EDT

Recently, I was interviewed by Newsmax TV and the interviewer asked me a question that I rarely get asked. So I figure I'd expound upon it here to you.

He asked me, what are the three things that I'd do now to turn the economy around. I said, well, there are actually two biggies that come to mind.

One of the things has to do with lowering the corporate tax rate here in America. You see, right now, there's around $2 trillion worth of cash sitting outside the United States from U.S.-based companies.

Why don't they just bring it home and expand businesses here and hire more Americans? It's because America has one of the highest corporate tax rates in the entire world! Right now, the top corporate tax rate is 35 percent. Yet they could park their money in Germany and get taxed 15 percent or Ireland for 12.5 percent.

There are many places in the world that charge a far lower tax rate than the United States does. So the United States is not conducive right now to bringing money back home. If these large corporations did, they'd hand over one-third of it to the government just to bring it home.

Why do that when they can grow more abroad and get taxed at a lesser rate? These CEOs and CFOs aren't stupid. So they keep the money where it's treated best, which is outside of the United States.

However, Congress could change this at anytime they wanted. So why don't they do it?

It's their belief that they can play the "waiting game" and these companies will be forced to bring the money back and they'll reap more in taxes. However, they're wrong. These companies NEVER have to bring the money back home. The world is a big ole' place. They can continue to expand in higher-growth, low-tax markets for as long as they want to.

All it would take is one vote in Congress and the money could come flooding back in and cause more U.S. corporate expansion and U.S. job creation. Do these companies want to do this? Oh yes! They've made it clear. They've even spoken before Congress on this issue. Companies like Apple, Intel, Cisco, etc. (which have enormous cash hoards) would love to bring some of that money home if Congress would work with them, but Congress refuses.

So one of the biggest hindrances to job creation and job growth is in Washington, D.C.

The next thing that could be done concerns the Federal Reserve.

In theory, the Fed prints money and gives it to the banks to help the economy recover. Here's how it "supposedly" works. The banks add extra zeros to the excess bank reserves of the major banks all over America.

Those banks will, in theory, take that extra money and make loans with it. They'll lend to businesses so that they can grow and expand. And they'll even lend to individuals for things like home improvements so that the value of their real estate will grow, etc.

But, like I said, that's in theory. You know, "in theory" is the world where M&Ms fall from the sky. That's not reality.

In reality, the Fed adds zeros to banks' excess reserves and the banks take the "free money" and buy Treasurys with it. They have an almost-riskless investment, which gives them more almost-free money (due to the interest they earn from the Treasurys) with which they rebuild their balance sheets.

They don't dare lend out the money because the times when the Fed is giving them "free money" is also the same time when the economy is beaten up black and blue and when the jobless rate is high. So the chances of the loan being repaid go down dramatically.

And these bankers aren't stupid. So they decide to use that money (and time) to rebuild their balance sheets and await the better economic times to come, when lending might be more favorable.

Banks love earning interest. But they HATE paying interest. So if the Fed would charge them interest on their excess reserves (especially if its greater than what they can earn in Treasurys), they'll get to lending that money since the loan would be at a much greater degree of interest than would the yield on the Treasurys, thus overcoming the effects of the interest charged by the Fed.

If these two things happened — lower corporate tax rates and interest charged on excess reserves for the money lent by the Fed — we'd see corporations repatriating money home to the good ole' U.S.A. and that could cause corporate expansion and job hiring to happen.

If the banks were forced to make loans, we'd also see corporate expansion and more job creation. The problem is that Congress isn't concerned enough about job creation to make this move to lower tax rates. And the Fed doesn't have the desire to charge the banks interest.

But if these two things would happen, they would do more to spur economic growth and job growth than most any other thing you could do!

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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Recently, I was interviewed by Newsmax TV and the interviewer asked me a question that I rarely get asked. So I figure I'd expound upon it here to you.
Fed, banks, US, tax
Monday, 28 April 2014 08:07 AM
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