The disappointing jobs report for the month of June provides even greater urgency for Washington to put into action policies that will boost our flagging economic recovery. Americans struggling to pay the bills are looking for action now. We strongly support corporate tax reform – it is essential to keeping us competitive. But this is likely to take time and with few options available now that will immediately help the economy, elected officials should allow U.S. businesses the freedom to bring upwards of $1 trillion currently trapped overseas home to America to invest it here.
A 2004 effort that allowed worldwide American businesses to repatriate their global earnings led to strong growth, with companies bringing home over $300 billion. According to a 2008 survey of 400 companies on the usage of these funds, 23 percent of repatriated dollars went toward job creation, 24 percent toward capital investment, and 12.4 percent to pay down domestic debt.
Steven Englander, head of G10 foreign exchange strategy at Citigroup, wrote in January 2011, “2005 was the only strong growth year in the decade in which U.S. growth was not fed by ‘bubble’ forces that eventually blew up.” Englander and other experts have also commented that repatriation would improve balance sheets and financial statements of publicly held companies and improve the attractiveness of other asset markets relative to the bond market. According to a CNN/Fortune article, “a tax holiday could help prop up the slumping greenback as well. Companies looking to repatriate funds would have to buy dollars — substantial amounts of them, given the major sums involved. And since oil and commodities are denominated in dollars, a rallying greenback would help bring down prices and keep these key risks to the economy in check.”
Upon the measure’s passage in 2004, the S&P rallied 6.5% and gained 15% by the end of the next year. Real GDP grew substantially, from 3.1% in 2004 to 4.3% in 2005, and unemployment dropped from 5.5% in 2004 to 5.0% in 2005, and continued to drop to 4.5% in 2006. JPMorgan’s chief U.S. equity strategist in a recent report called repatriation “an injection of liquidity to the US financial system,” and “…that as much as $500 billion-$1 trillion could be repatriated compared to $362 billion in ’04. In other words, from a market’s perspective, this likely represents a substantial catalyst–like the QE of ’11/’12.”
Critics of repatriation often cherry pick facts and cite incomplete studies about what occurred following 2004. The real question for these critics is would you prefer for the money to work for our foreign competitors, because it is not coming back absent action from Washington. The fact is, the economy of today looks nothing like it did in 2004, and it is time we adjust our tax laws so American businesses can better compete. It’s a simple choice – a trillion dollars into our economy or a trillion dollars that continues to sit overseas.
Repatriation has broad and growing bipartisan support in Congress, and represents one of the few viable options that inject upwards of $1 trillion into the economy at zero cost to taxpayers. With so much money sitting in foreign banks waiting to be brought home, news like June’s jobs report once again makes clear we cannot afford to continue to let it sit overseas. We need to bring it home and put it to work for America.
Some observers are now calling for a “repatriation holiday” on profits held by foreign subsidiaries as a way to get companies to bring their profits home, in turn creating jobs. Unfortunately, a tax holiday on repatriated funds is a proven failure and would be expensive in both direct and indirect ways.
A repatriation holiday would allow corporations to transfer profits from foreign subsidiaries to the U.S. parent company at a steep tax discount. Currently, corporations can defer U.S. corporate tax on overseas income until profits are transferred back to the parent company. Repatriation would allow a large proportion of foreign profits to be distributed tax free to the U.S., essentially reducing the effective tax rate from 35 percent down to just 5.25 percent. On the surface, it might sound like an effective strategy for incenting U.S. firms to invest profits held abroad in the domestic economy.
But the idea is replete with problems. In many instances, these corporations already have accrued these profits tax-free—using techniques that shift reported income to tax havens like Bermuda or the infamous “Dutch sandwich” used by Google to avoid an enormous amount of tax. Certainly, taxes ought to be paid at some point.
In addition, firms aren’t likely to invest the repatriated funds. Congress passed a repatriation tax holiday in 2004 and required firms to create domestic jobs or make new domestic investments to get the tax break. Nevertheless, the firms on average used the tax break to repurchase shares or pay dividends, not increase investment. The holiday instead turned into a massive tax break for shareholders with little or no resulting economic gain or job market expansion. Why? Corporations simply reported repatriated funds as the source of money for investments or jobs they would have created anyway, and used other funds to increase shareholder wealth.
Today, domestic firms are sitting on near-record levels of liquid assets. The reason they are not investing or creating more jobs is not a shortage of cash. Allowing them to repatriate foreign profits at low tax rates would only heap more cash onto their already huge stockpile.
There are substantial costs associated with a repatriation holiday, too. First, allowing repatriation today means less taxable corporate profits in the future, which translates into less government revenue. Second, and perhaps even more costly than the lost revenue, is the dangerous precedent that firms will increasingly expect regular repatriation holidays. This expectation will induce firms to hoard profits overseas and perhaps move production abroad, betting that Congress will eventually grant them another “one-time” tax break.
For years, companies that invest overseas have claimed that this practice bolsters U.S. jobs. Now they argue that sending the money back to the U.S. would spur economic expansion. They should make up their minds.
U.S. policymakers shouldn’t become the “Charlie Brown” of the tax world, repeatedly getting tricked into trying to kick a football that just isn’t there. We do need to stimulate a wavering economy and reform our tax system, but periodic tax holidays on repatriated funds are not the way to achieve either goal.