Repatriation Tax Holiday Not a Stimulus


Repatriation Tax Holiday Not a Stimulus

Nov 29, 2011 3 min read

Former Norman B. Ture Senior Fellow in the Economics of Fiscal Policy

J.D. served as the Norman B. Ture Senior Fellow in Economics of Fiscal Policy

America's multinational companies are pushing hard for another repatriation tax holiday. Yes, pro-growth tax cuts and tax reform should be on Congress' agenda to get the economy moving again. But there are much better options than this jobs dud, starting with making the George W. Bush tax cuts permanent.

America's companies have enormous piles of profits overseas, locked up abroad by misguided U.S. tax policies. With America's weak economy, the companies argue that Congress should suspend these tax policies, unlock the profits and allow the surge of repatriated profits to pump up domestic investment.

Everything about this theory is correct but the punch line. U.S. tax policy is punitive toward U.S. foreign (and domestic) investment. U.S. companies mitigate the effects of U.S. policy by leaving their profits overseas. Consequently, companies have built up an enormous stockpile of foreign profits waiting to rush back home if given a chance.

To be clear, temporarily suspending U.S. tax policy affects only profits already earned. It would be a retroactive tax cut, not a hint of better policy to come.

Yet, a retroactive tax cut could be defensible if it led to increased U.S. investment and jobs. Alas, as a similar experiment in 2004 demonstrated, it will do no such thing. To be sure, companies will repatriate vast sums from abroad, yet nary a job will be created.

How can that be? Consider the following example. As you walk into the store, you're given $100 to save or to spend as you choose. Trouble is, there's nothing in the store you want. So you pocket the $100, browse a bit to be polite and go on your way.

America's multinational companies are sitting on piles of domestic cash today, just as they are sitting on piles of foreign cash. They are investing, but could do much more with the financing already available if there was a reason to do so. The trouble is, there isn't.

In the judgment of America's businesses, existing capacity and the economy's uncertain future mean it is wiser to plow excess funds into low-yielding liquid assets than into more job-creating investments. This sad situation infuriates Washington policymakers. But given the weak economy, it seems a rational decision.

Under another repatriation holiday companies would shift foreign cash to their domestic stockpile of idle resources. Query: Has anything happened to improve investment opportunities in the United States? No.

Companies just have more idle domestic cash. So, just as with the lucky shopper and his newfound $100, there's nothing to buy. As in 2004, companies will just pay out the cash as extra dividends, or buy back shares, or sit on the money. No harm done, but no jobs created either.

This point apparently has sunk in, so proponents have switched tacks. Sure, they say, companies will distribute the cash to shareholders, but that will stimulate the economy because shareholders will have more money to spend. Notice how the traditional and once-again proven failed Keynesian theory of "putting money in people's pockets" has snuck in. Keynesian flaws aside, the argument flops.

When a company repatriates $1 and distributes it to shareholders, the company's value falls by $1 a share. The company doesn't have the dollar, the shareholders have it. So the company is worth $1 a share less. If shareholders wanted a portfolio shift to cash, they would have sold shares to get the dollar. But they didn't. The company just sent them an extra check. They're given $1 a share to spend, but there's nothing extra they want to buy. Sound familiar?

Congress can help the economy, first and foremost by lifting the wet blanket of fear that hangs over families and businesses. Getting spending and federal budget deficits under control would be a good start. It would also help if President Obama stopped threatening to raise taxes on job creators.

For the long term, Congress should consider fixing the tax rules that diminish America's international competitiveness and that led to U.S. companies building piles of foreign cash in the first place.

Cutting taxes can also help. But with deficits and unemployment as high as they are, we need to be smarter about which taxes to cut. As economic stimulus, the repatriation tax holiday just doesn't cut it.

J.D. Foster, Ph.D., is the Norman B. Ture senior fellow in the economics of fiscal policy in the Roe Institute for Economic Policy Studies at the Heritage Foundation

First appeared in The Washington Times