corporate tax and cisco and dividendsCisco Systems, like some other tech firms, is being labeled a “hoarder” for paying a small dividend. Moreover, Cisco’s stock price is down this year alone 20% or so. Many shareholders, notably Ralph Nader, recently criticized Cisco for paying such a small dividend (annually 24 cents a share) because Cisco is sitting on approximately $43.5 billion in cash. The majority of this money is sitting in overseas bank accounts. So what could possibly be the reason why a well-capitalized company is deciding not to pay its shareholders a more reasonable dividend?

Well one reason can easily be the fact that the economy is on shaky grounds and John Chambers wants to make sure the company has enough capital to weather a potential financial storm that may be ahead of us. Another reason is the fact that some corporations have a tendency to favor more employee bonuses, salaries, perks, and other compensation rather than paying the owners of the company first. However, I believe the main reason that the company is deciding not to pay a larger dividend is simply due to the fact that government (Federal and CA State combined) would be taking in close to 45%. Hopefully, Nader does know that if Cisco decided to pay such a large dividend that the company would be forking over billions more in taxes?

With the Federal corporate tax rate of 35%, and a State of California Corporate tax rate of 8.84%, yes Cisco would be paying billions more in taxes when they bring that money into the United States. From a government revenue perspective, let’s not forget that dividends are double taxed. Therefore, the Federal government would most likely get another 15% percent on dividends paid to investors and CA would get another 5% in capital gains taxes. When it all said and done, Federal and State taxes collected would equate to more than 50% of the total capital. Moreover, this is in stark contrast to other European countries that let earnings be repatriated (UK, Russsia, Australia, France, Italy, Spain etc) at tax rates below 3%. Is there something wrong here?

John Chambers believes so. The CEO of Cisco Systems has been a proponent for a tax holiday in which US companies can repatriate earnings back into the United States tax free. This would bring vital capital back to the United States, create jobs (2 million according to Chambers) and new investments. Most politicians are for the holiday but there are always conditions attached to it. Maybe Nader would prefer to have a condition that they can pay a reduced tax rate for repatriating profits as long as those profits lead to increased dividends, domestic investment or jobs?

Many will argue, if anything, the time to allow the tax holiday is now. With the US economy chugging along, unemployment and jobless claims rising, maybe it is time for the government to encourage enonomic growth. After all, if US based corporations brought back approximately 1+ trillion dollars from overseas bank accounts into the United States would that be problematic?