(The Economist) -- THE White House has long promised to fund tax cuts by scrapping unspecified loopholes and deductions. As Congress fills in the blanks, there is one source of revenue that looks all but certain to be tapped: the staggering pile of cash America’s firms keep in foreign subsidiaries, which totalled $2.6trn in 2015, according to an estimate by the Joint Committee on Taxation. (The president says the figure is $3trn-5trn today.) Unfortunately, this would probably result in a windfall for shareholders, with few gains for anyone else.
Firms keep profits offshore primarily to avoid paying corporate tax, which is levied only when money is repatriated (monies paid to foreign governments are knocked off the bill). As untaxed profits have piled up, politicians from both parties have eyed them greedily. Hillary Clinton once hoped to start an infrastructure bank with money raised from firms’ foreign cash.
Getting firms to bring more money home has been tried before. In 2004 Congress enacted a tax holiday to that end. Firms were charged a bargain rate of 5.25%, instead of the usual 35%, on repatriated profits. The law’s advocates said it would spark an investment boom, despite warnings from President George W. Bush’s economic advisers that none would materialise. The wonks were right. According to the best available study, repatriations did not increase domestic investment or employment. Instead, each of the $312bn brought back to America was associated with a payout to shareholders of 60-92 cents. Regulations designed to stop such payouts were ineffective.
Circumstances are different this time. Republicans want more than a temporary holiday; they promise a switch to a “territorial” tax system, like those found in the rest of the rich world. That means taxing only profits earned at home, removing the incentive to stash away foreign earnings in the first place. Still, making the switch means deciding what to do with the cash accumulated overseas under the old system. The effect of bringing it home would probably be the same as in 2004. Yet the president says that repatriations would “spur billions of dollars in new investments in our struggling communities”.
There are three reasons for scepticism. First, firms are not short of cash to invest. In the S&P 500, the ten firms with the biggest foreign bank balances, totalling $683bn, already have $153bn to hand onshore. It is unlikely that filling domestic coffers further would encourage more investment, given that the same firms returned $138bn to shareholders in dividends and buy-backs over the past year. Repatriation alone would not suddenly make investments more attractive than such payouts.
Second, almost half of the cash firms hold in foreign subsidiaries is already denominated in dollars, according to a survey from 2011. These funds are probably sitting in American bank accounts. (Such deposits do not count as repatriations for tax purposes.) They already support bank loans, and hence investment, in America.
Finally, to the extent that firms do buy dollars to bring profits home, they will push up the value of the greenback. A stronger dollar would be bad for the manufacturers who are close to Mr Trump’s heart. It would also tend to increase the trade deficit, which he deplores.
In any event, the low tax rates Republicans and some Democrats want to levy on repatriated cash make little sense. In 2016 Republicans in the House of Representatives proposed a rate of just 8.75%; Mr Trump’s plans have suggested a 10% levy. If firms are forced to repatriate cash, there is an argument for a discount from 35%, says Alan Viard of the
American Enterprise Institute, a think-tank, because firms would lose the benefit of putting off the bill indefinitely. But go too low and the government would just be giving shareholders an unexpected payday.
A higher charge would help pay for tax cuts on future earnings—a policy which could spark new investment. It would also avoid rewarding tax-avoidance strategies. A recent study by scholars at Stanford University and the University of Chicago found that firms began stashing significant amounts of cash overseas at the same time as Congress started debating a second repatriation tax holiday in 2011.