The Persistent Myth About Cash 'Stranded' Overseas
In his endlessly excellent 1992 book, The Twilight of Sovereignty, former Citibank CEO Walter Wriston addressed the somewhat well-known truism that 2/3rds of all U.S. dollars in circulation were in fact "overseas." The late Wriston confirmed the truism, while revealing an oft-missed nuance to the story. Most of those overseas dollars were in the branches of foreign banks right in New York City. And as banks can't warehouse cash without going out of business, those overseas dollars were rapidly being lent out right here in the United States.
So while it's certainly true that the dollar's status as the world's reserve currency renders it very useful as a globally important measure of exchange and investment, most overseas dollars eventually find their way back to the United States. That they do is worth mentioning in light of never-ending commentary about foreign earnings of U.S. corporations lying "stranded" overseas to the U.S. economy's alleged detriment.
For basic background, many American corporations have offices, subsidiaries and sales in foreign countries. The difference for U.S. companies is that while their foreign competitors are generally only required to pay local/country taxes on their foreign earnings, U.S. corporations not only pay the local/country tax, but they also face a U.S. tax on foreign earnings they bring back to the United States.
About all this it should be said up front that the corporate tax itself is very unfortunate. Corporations are owned by individuals, and as individuals we've already paid taxes on our income. How wrongheaded it is that we're then double-taxed when we delay consumption in favor of the investment that is always and everywhere the source of company and job creation. The corporate tax is a penalty levied on the very saving that powers all economic advancement.
With regard to foreign earnings, American tax authorities add insult to already serious injury. While U.S. companies are already paying foreign corporate taxes on their earnings, they similarly face a U.S. tax if and when they return those earnings to the United States. In a normal world this tax wouldn't exist. Again, taxes have already been paid overseas, not to mention paid by the individuals whose savings make company creation and expansion possible in the first place.
Still, it's popular to say that because of the "repatriation tax," trillions in foreign earnings that would otherwise flow to the U.S. sit "stranded" overseas. To believe some, this has supposedly been a major driver of a slower U.S. economy. The belief fails on countless levels.
For one, U.S. companies have overseas operations for a reason. They see opportunity there. And if there are profits being earned in foreign lands, it's folly to automatically assume that absent repatriation taxes those profits are going to be immediately brought back to the U.S. for investment in American economic endeavor. Profits have a tendency to beget more investment, so if U.S. companies are profiting globally then it's logical to assume that some portion of their foreign gains will be re-invested in the successful foreign operation, or deployed to other foreign locales ripe for expansion.
Second, companies can't just invest for the sake of investment. They have both shareholders and board members to please. No matter the abundant foreign earnings of U.S. corporations, they can only repatriate them for stateside investment insofar as projected returns stateside exceed what they could realistically earn outside of the U.S. Ok, and as evidenced by somewhat subdued U.S. economic growth throughout the 2000s, opportunities in the United States haven't been as great as they were in the 1980s and 1990s. In short, some foreign profits banked by U.S. corporations haven't remained overseas due to taxes as much as the opportunities for positive returns have revealed as more impressive globally than in the U.S.
Of great importance in the previous paragraph is the word "banked." It's said by those who desire erasure of the repatriation tax that otherwise abundant investment headed for the U.S. lies "stranded" overseas thanks to the U.S. tax on repatriated profits. The very notion is totally nonsensical. Unless immediately reinvested, profits and earnings end up in banks or other forms of saving. Savings quite simply do not lay idle. They don't because banks, money market funds, brokerages and all manner of savings concepts are borrowing savings so that they can lend them.
Whether earned by foreign companies or subsidiaries of U.S. companies operating in foreign lands, profits saved are immediately lent or invested around the world. As evidenced by massive amounts of foreign investment reaching the United States, a healthy portion of foreign earnings end up in the U.S. The idea of "stranded" profits flies in the face of basic banking, savings and investment logic.
Yet assuming the absurd, as in repatriation taxes specifically blocking the migration of U.S. corporate profits earned overseas that would otherwise flow back to the U.S., we can't forget the Robert Mundell truism that "the only closed economy is the global economy." Assuming a U.S. investment shortfall solely related to repatriation taxes such that promising American ideas go wanting, non-U.S. corporate sources of investment would immediately fill in where tax-hamstrung U.S. companies couldn't or can't. Put simply, the foreign earnings of U.S. corporations are far from the only source of investment in the stateside economic activity of U.S. companies. The repatriation tax is a silly one, but it is decidedly not the cause of lighter investment in U.S.-based economic expansion.
Interesting about all this is that the same illogic applied to foreign earnings has infected commentary about the profits of U.S. corporations booked right here. It's said that U.S. companies are "sitting" on trillions worth of cash. No they aren't. If true, their CEOs would already be unemployed for them literally warehousing cash that could otherwise earn a return (albeit small in many instances) if placed in a bank, money market fund, brokerage, etc.
Corporations never sit on cash. If they don't have an immediate use for it they are banking it. If so, another corporation or individual is accessing what the first corporation doesn't have an immediate use for. Despite what we're told, there aren't trillions of corporate profits sitting idle somewhere. Capital is always in motion.
Are corporations perhaps gun shy? No doubt some are. In the U.S. we've had two straight presidents whose understanding of economics has been less than impressive. Policy from both has reflected their confusion. As a result investment has been far less intrepid than normal. Despite that, the economic ineptitude of Presidents Bush and Obama hasn't meant that corporate earnings or wealth have been warehoused.
Still, those who wrongly presume that U.S. suffers a lack of investment thanks to "stranded" capital overseas, or idle capital stateside, do have a point. Wriston would have understood it. Long ago he correctly observed that "Capital will flow where it is wanted and stay where it is well treated."
Going to back to Presidents Bush and Obama, their economic policies have served as a capital repellent. Markets have long been responding to those policies. The latter has amounted to capital not being treated as well in the U.S. such that's it's migrated elsewhere. The U.S. certainly does have an investment problem in a relative sense, but the repatriation tax isn't the source of the reduced investment.
It's about relatively lousy U.S. economic policy overall. If fixed, as in if the simple tax, regulatory, monetary and trade barriers to production are removed, investment in the U.S. will soar. This will be true no matter a tax on repatriated profits that has never been a barrier to investment in the first place.
