$1.4 Trillion Cash Stash Could Stoke Job Market
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The Fiscal Times
October 14, 2011

A proposal to encourage U.S. multinationals to shift overseas profits back to the U.S. at a bargain-basement tax rate is picking up momentum, with a growing coalition of lawmakers, business leaders, and economists touting it as a way to jolt the economy and create jobs.

U.S. corporations hold at least $1.4 trillion in offshore accounts, according to JPMorgan Chase.  But many companies, including Cisco, Apple, Pfizer, General Electric, Microsoft, and Google, say they are prepared to bring those profits home in return for what would essentially be a one-year tax holiday.

Corporations and shareholders like the so-called repatriation initiative because it would allow for stock buybacks and higher dividends since the earnings being held abroad would be taxed at a far lower tax rate than the 35 percent the U.S. normally levies on large multinationals. In fact, the rate would be even lower than what they pay in low-tax jurisdictions like Ireland, which has a 12.5 percent corporate tax. 

U.S. multinationals also say a repatriation program would motivate them to direct overseas profits toward job-creation, even if they can’t commit to specific hiring levels.  “Do I know how many jobs it’s going to create? I don’t,” GE CEO Jeff Immelt said on 60 Minutes last weekend. “But it can’t intellectually be any good to anybody to have $1.4 trillion outside of the U.S.”

Repatriation got a major endorsement on Thursday when former Clinton economic adviser Laura Tyson released a study showing that a repatriation holiday that lowered the corporate tax rate for one year to 5.25 percent, would create as many as 2.5 million new jobs and increase U.S. GDP by as much as $336 billion. This report follows a similar one released last month by the U.S. Chamber of Commerce, which found that the stock buybacks and dividend payments a temporary repatriation holiday would create 3 million jobs and increase U.S. GDP by $360 billion over eight quarters. 

Tyson, a business professor at University of California at Berkeley, also serves on President Obama’s Jobs Council and is part of a growing chorus of moderates and Democrats warming to the repatriation idea, which has traditionally been backed only by Republicans and business groups. 

The findings of Tyson and the Chamber are at odds with the Obama Administration, which firmly opposes a repatriation tax holiday.  “In 2004, when the U.S. enacted a repatriation tax holiday, the goal was to encourage U.S. multinationals to pay bigger cash dividends from their overseas subsidiaries and use the cash to make investments in the United States,” Assistant Treasury Secretary for Tax Policy Michael Mundaca wrote in a Treasury blog post last spring. “Unfortunately, there is no evidence that it increased U.S. investment or jobs, and it cost taxpayers billions.”

Last week, Sen. Kay Hagan, D-N.C., and Sen. John McCain, R-Ariz., introduced the Senate’s first bipartisan repatriation bill. It would let companies bring back offshore profits at a top tax rate of 8.75 percent and a bottom rate of 5.25 percent if the company commits to boosting its U.S. payroll by 10 percent. Senate Majority Leader Harry Reid said last week he is open to supporting a repatriation program as part of a larger jobs agenda.  Sen. Chuck Schumer, D-N.Y. has been urging Democrats to support a repatriation initiative to drive up short-term tax receipts and pay for the creation of an infrastructure bank. Also this week, the Blue Dog coalition of conservative Democrats wrote a letter urging the 12-member Super Committee to include a repatriation initiative in their deficit-reduction package. 

We could see a repatriation initiative deal as soon as December, says Ken Kies, a tax corporate tax lobbyist. He predicts a tax holiday could be a ripe trade-off for Republicans to glom onto in return for fulfilling the Obama administration’s upcoming wish to extend unemployment benefits beyond 99 weeks and prevent Medicare reimbursements for doctors from falling 32 percent at the end of 2011. That, combined with widespread acceptance from lawmakers and business leaders that tax reform will be delayed until after the 2012 presidential election, has further heightened lawmakers’ interest in repatriation as a vehicle for showing they care about creating jobs, he said.  “Even if all they [companies] did was bring money home and pay out dividends, 85 percent of U.S. multinational stocks are held by Americans,” he said.  “If they came home and paid out $700 billion in dividends, it would mean a massive amount of money flowing into the economy no matter how you view it.”

Until the last few weeks, there hasn’t been much discussion about repatriation because of multiple reports that found a 2005 tax holiday didn’t deliver any measureable benefit to the U.S. economy. The 2005 program cut the top U.S. corporate tax rate for companies repatriating foreign profits from 35 percent to 5.25 percent. Although companies brought $362 billion worth of profits back to the U.S., according to IRS estimates, the money failed to stoke U.S. investment and employment or stimulate demand, a 2010 Congressional Research Service report found. Earnings were instead routed back to shareholders through stock repurchases and dividend payments and had little effect on job creation.

Additional 2010 research from Northwestern University law professor Thomas J. Brennan also found that the 2004 holiday caused companies to stockpile more of their profits abroad. The presumption was that there would be another tax holiday when they could once again cash in on reduced rates. 

Others not drinking the Kool-Aid include Sen. Carl Levin, D-Mich. He says the 2005 experience suggests that a repatriation initiative would be a dead end for the U.S. economy. “The U.S. Treasury lost out on billions of dollars in tax revenues with no evidence of the benefits that it expected to receive for the loss,” Levin said in a report. According to the Joint Committee on Taxation, a 5 percent tax break on overseas profits would cost the U.S. government $79 billion in lost revenues over 10 years.  

Repatriation critics such as Ed Kleinbard, a tax law professor at University of Southern California, points out that much of multinationals’ liquid assets are already in U.S. financial instruments. “It’s not like we open the door to let the puppy [in] out of the rain, letting the poor dollars find their warm home here in the U.S.,” he said in a conference call with reporters on Thursday.  “A large portion of that $1.4 trillion in assets is held in U.S. bank deposits, U.S. commercial paper, U.S. government securities, and the debt obligations of other U.S. firms,” because the ultimate owners of the companies keep their assets in U.S. dollars, he said.  “The route [of the money] is a little bit indirect, but it’s already here and working for all of us collectively.”