Frank Aquila makes an excellent suggestion in the San Francisco Times for a legitimate private-sector stimulus: dropping the current 35% tax barriers for repatriation of a company’s foreign-source income (at least for a tax holiday, if not permanently). The USA is a rarity in that it taxes revenue made outside its borders—but it only taxes it once it is brought back into the country. This amounts to an incentive for companies (which are naturally going to expand globally whenever possible in today’s flat earth economy) to keep their profits from ever re-entering the country. Money made abroad stays abroad. In contrast, Aquila suggests dropping (or massively reducing) this tax, allowing companies to repatriate their foreign profits (that is, bring their profits back to the USA)
Repatriation on such a scale would in effect be the largest economic stimulus ever. Not only would the cash go right where it is needed the most — the private sector — but it wouldn’t add a single dollar to the federal budget deficit. Actually, the economic growth created through the use of this cash would generate billions in additional tax revenue.
Most successful U.S. multinational companies face the dilemma: Keep the cash overseas or bring the profits home and pay the tax bill.
This isn’t a merely theoretical debate about tax policy. Last month Microsoft Corp. said it would sell as much as $6 billion in debt to fund dividend payments even though it has about $37 billion in cash and short-term investments on its books. Since most of its cash is overseas, borrowing makes better economic sense because the cost of borrowing is far lower than the tax.
The opponents of such a plan argue that dropping this tax barrier will only encourage companies to outsource even more jobs—essentially, they argue, the present structure should be retained as a form of protectionism. Of course, this isn’t true at all—it’s the USA’s artificially high wages and insurance costs that are driving jobs overseas, and the present tax barrier isn’t preventing that at all. Rather, companies are simply expanding abroad and not bringing the money back (since they’d be so harshly penalized for doing so). But allowing these companies to repatriate would give them the ability to invest in more American workers without adding yet another penalty for spending their money in the USA. Aquila observes,
Rather than weaken the economy, successful multinational companies have been engines of growth. As Harvard Business School professor Mihir Desai has noted, when U.S. businesses “expand abroad they expand at home.”
Companies that prosper internationally expand their research, development, management, human resources, information technology, marketing and financial teams, and most of those new jobs wind up right here in the U.S.
Even if most of the money went towards buybacks and dividends, it would be beneficial in the long haul:
Others who oppose a tax holiday point to a study by the National Bureau of Economic Research that showed a large percentage of the funds repatriated in 2004 were used for dividends and share buybacks.
While those findings are probably accurate, this misses the point. Pumping new cash into the economy will have a positive impact. Even if companies simply return the capital to their shareholders, that is a positive outcome since investors will either spend the cash or reinvest it.
He’s dead right here—the USA needs to focus on real wealth creation, and the repatriation of all that cash is the sort of thing that allows for just that sort of thing (through reinvestment and new job creation)—and all without having to raise a single additional tax dollar or lowering interest rates. As Aquila argues, the USA should be striving to refine its tax code to make its companies stronger against their global competition, not penalizing them for bringing their profits home. We have already had massive trade deficits for years, and by encouraging companies to keep their profits abroad, we are only exacerbating that problem.
