The Repatriation Tax Is Much Ado About Nothing

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As the world's reserve currency, almost 70% of all dollars in circulation have an overseas address. Dollars liquefy global trade and investment, and until another currency trumps it in terms of worldwide acceptance (one can hope!), a majority of the greenbacks issued will continue to circulate around the world.

This is notable at present given an increasingly popular sentiment within the commentariat that taxes on foreign earnings are holding back our economic recovery. According to Cisco CEO John Chambers and Oracle president Safra Catz, U.S. firms have $1 trillion worth of foreign earnings that, if not taxed at the corporate rate of 35%, would be repatriated to the U.S. on the way to significant job creation stateside.

About the tax on foreign earnings, it should be said that it's an unfortunate one and that U.S. headquartered firms should not face nosebleed rates of taxation for repatriating earnings to the States. Taxes should go down, and ideally the corporate tax rate would be zero.

At the same time, the suggestion that greatly reducing the repatriation tax, or zeroing it out altogether is the path to economic nirvana is a naïve one on its best day. The reason it is has do with the simple truth that dollars are fungible.

Chambers and Catz wrote recently wrote in the Wall Street Journal that if not taxed so heavily, repatriated earnings "could be invested in U.S. jobs, capital assets, research and development, and more." That may be true, but implicit in their argument is that foreign earnings are literally hid under a mattress as a way for U.S. companies to avoid the tax man. That's not true.

Instead, once U.S. companies achieve foreign earnings, as opposed to hiding them, they bank those dollars much as they do yen, euros and any other foreign currency. Once in the bank, those dollars are lent at a market rate of interest, and with the dollar most useful inside the United States, foreign earnings quickly reach what lenders deem economically viable concepts within these fifty states.

Returning to the suggestion that taxes on repatriated foreign earnings are killing jobs in the U.S., empirical data point to the opposite. As Dartmouth professor Matthew Slaughter has found, earnings invested overseas to fund the growth of foreign subsidiaries have correlated with strong growth domestically.

Specifically, Slaughter has calculated that for every foreign job created by firms with a U.S. address, nearly two jobs were created in the United States. From 1991 to 2001, foreign subsidiaries created 2.8 million jobs in foreign locales, and this coincided with the creation of 5.5 million jobs at home by those same companies.

Chambers and Catz once again argue that due to the repatriation tax, U.S. firms are short $1 trillion. This of course assumes that they don't access the capital markets for funds as most companies do, and it also ignores the greater realities when it comes to the U.S. economy.

What's apparent is that banks with a U.S. address are presently awash in cash, so much so that a good number of dollars on bank balance sheets are presently sitting at the Federal Reserve earning a small rate of interest. That's the case because far from an economy suffering a lack of "dollars" necessary to create jobs, greenbacks ready to be loaned at low rates of interest are not in demand.

They're not for reasons that most readers already know: tax, regulatory and electoral uncertainty, not to mention a dollar itself that is very weak. Lending isn't down due to a dollar shortage, but instead is presently slow because demand for growth capital has decreased substantially.

So while abolishment of the repatriation tax wouldn't be a bad thing, it detracts from what is a greater problem when it comes to stateside investment: the corporate income tax itself. Better it would be for legislators to reduce the latter on the way to making the U.S. a more attractive overall destination for investment.  Capital goes where it is treated best.

Ultimately the repatriation argument is a monetarist one suggesting that dollars on their own are a source of economic energy, and that the economy suffers a dollar shortage driven by a tax on dollars returned to the States. Good political rhetoric for sure, but with capital able to move across borders at great speed, if the investment climate stateside were sound, capital would flow here at low rates of interest irrespective of how the IRS taxes foreign earnings.

Looking ahead, it's a fair bet that the foreign earnings tax will remain a political issue. That's unfortunate if so, because it is decidedly not what's keeping investment from reaching the United States. Worse, more tinkering on the edges of our complicated tax code will continue to detract from its simplification; the latter a much bigger barrier to investment than some obscure, albeit faulty tax on earnings achieved outside our borders.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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