Repatriation and Other Steps to Enhance Short- and Long-Term Economic Growth
Prepared for the U.S. Chamber of Commerce by Douglas Holtz-Eakin
The Short-Run Issue
Policymakers are considering a temporary reduction in the taxes on foreign earnings brought back to the United States by its multinational corporations (“repatriation tax policy”). For example, H.R. 1834, the “Freedom to Invest Act of 2011” would reduce the tax on repatriated dollars to a maximum of 5.25 percent (from 35 percent). The repatriation tax policy is desirable from several perspectives:
- Cash that would otherwise be trapped overseas would flow back into the United States. J.P. Morgan estimates that at least $1.4 trillion in undistributed foreign earnings are locked abroad; Moody’s warns that U.S. tech companies could hold 79 percent of their cash overseas in the next three years. The short-run stimulus provided by repatriated dollars would speed the pace of economic recovery, increasing GDP by roughly $360 billion and creating approximately 2.9 million new jobs;
- A reduced tax on repatriated earnings is a step toward a territorial tax system – a system with a permanent zero or very low tax on repatriation. A territorial system would improve U.S. international competitiveness; and
- The repatriation tax policy would contribute to a lower overall corporate rate at a time when the high U.S. rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers.
How Repatriation Affects the Economy
Repatriation can be thought of as a private-sector approach to stimulus. As with the American Recovery and Reinvestment Act (ARRA), cash flows would become available for hiring, real purchases of investment goods, and research and development. These cash flows would put resources in the hands of families and other companies. (See figure.)
At the same time, some corporations may choose to undertake financial transactions to retire debt, pay dividends, or repurchase shares. The possibility of such actions is often presented as a criticism of a repatriation tax policy. However, as the Congressional Budget Office said regarding the jobs impacts reported by recipients of ARRA money,
“...the law’s overall effects on employment requires a more comprehensive analysis than can be achieved using the recipients’ reports.”
A more comprehensive analysis recognizes that those financial transactions have two effects. First, they put resources in the hands of other economic actors – firms, households, pension plans, investors, etc. – who continue the chain of real purchases and financial transfers. (See Figure.) Second, actions like share repurchases will raise share values. The improvement in valuations provides wealth that supports household spending and overall demand.
How Much Cash Might Flow Into the Economy?
To gauge the plausibility of these estimates, I conducted an informal poll of U.S. corporations that have potentially large amounts of overseas earnings available for repatriation. While the small response (10 firms) argues that the results are best characterized as anecdotal, the results imply a crude range of $800 billion to $1.2 trillion.
How Large are the Likely Economic Effects?
Estimating the impact of any policy changes is fraught with uncertainties. However, building upon the work of the Congressional Budget Office in analyzing stimulus (see Table) the midpoint of the repatriation estimates implies higher GDP by between $175 and $545 billion (corresponding to an increase of between 1 and 4 percent). Similarly, the CBO analysis implies an additional 1.6 million to 4.2 million more Americans at work over the course of 8 quarters of implementation.
As the table indicates, scenarios in which repatriations exceed or fall short of the midpoint scenario generate correspondingly larger or smaller impacts. However, using the midpoint scenario and choosing the middle of the CBO-implied range suggests a rough GDP impact of $360 billion and the creation of 2.9 million jobs.
Results Based on CBO Analysis of ARRA
The Long-run Issue
The U.S. corporation income tax is in need of fundamental reform. In addition to the fact that its worldwide scope is damaging the ability of the U.S. to compete in foreign markets and retain the headquarters of large, successful multinational firms, the corporate tax rate is too high, the corporate tax is anti-growth, and the tax is too complex. Fundamental reform would aid investment in the United States, the compensation of U.S. workers, and the overall pace of economic growth.