Republicans have their eyes on trillions in foreign profits parked overseas by U.S. companies. The GOP tax blueprint released last month aims to end “the perverse incentive” for companies to keep foreign profits offshore.
To do that, Republicans are proposing to move away from the current “worldwide” taxation system for corporations, which taxes both domestic and foreign profits, to a “territorial” system that would exempt U.S. businesses from paying taxes on their foreign profits. They also plan to create a significantly lower tax rate for profits that have already been earned but are being kept outside the country to avoid U.S. taxes. President Trump and other GOP leaders say the repatriation of foreign profits is one of the key fiscal changes that will boost economic growth.
Estimates of how much money is sitting offshore vary, but there’s little doubt the numbers are quite large. Apple alone is reportedly sitting on $216 billion overseas, and Microsoft has about $128 billion in offshore accounts. Trump has claimed that as much as $5 trillion is at stake, but most estimates are about half that. In a note to clients Thursday, Goldman Sachs pegged the number at $3.1 trillion.
Aside from the amount, though, there’s a more fundamental question about the effect repatriation would have on the economy. Critics of the GOP plan argue that much if not all of the foreign profits are held “overseas” only in a technical sense — the cash may be on the books in Ireland or Bermuda, but it’s fee to roam the Earth in pursuit of returns.
Adam Looney of the Brookings Institution took up the subject Wednesday, arguing that the repatriation of profits won’t help the U.S. economy because the money has already come back: “Given how we talk about these earnings, you could be forgiven for thinking U.S. companies have stashed their cash inside a mattress in France. They haven’t. Most of it is already invested right here in the U.S.”
An analysis by the Senate’s Permanent Subcommittee on Investigations in 2011 came to a similar conclusion, finding that “that large multinational U.S. corporations with substantial offshore funds have already placed nearly half of those funds in U.S. bank accounts and U.S. investments without paying any U.S. tax on those foreign earnings.” In its note to clients this week, Goldman Sachs sides with the skeptics: “Repatriation is likely to have a limited effect on investment in the US because the unrepatriated earnings are already largely available for domestic activities.”
That’s not to say, however, that repatriation wouldn’t generate significant tax revenues. According to Goldman Sachs, “Most estimates of the revenue effect of a tax on deemed repatriation suggest that a 10% tax on untaxed earnings held in cash and cash equivalents and a 4% tax on reinvested earnings would generate around $160bn.”