The Trump Tax Idea That’s a Boon for Shareholders

https://www.nytimes.com/2017/10/03/opinion/trump-tax-plan-repatriation.html

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One of the proposals in the Republican tax plan set out last week — a bid to get American corporations to “repatriate” their untaxed corporate overseas profits — has support both in Congress and in the Trump administration. As much as $2.6 trillion in such profits sits in offshore subsidiaries of United States corporations.

Under the plan, the government would declare a tax holiday — a rate as low as 10 percent — to encourage the United States companies operating overseas to repatriate their overseas profits. Congress and the president see getting this money back to the United States as a way to goose job and wage growth in the United States and to fill some of the revenue holes that are expected as a result of the plan’s other sweeping tax cuts.

Treasury Secretary Steven Mnuchin, for instance, said that the tax break “will bring back trillions of dollars that are offshore to be invested here in the United States to purchase capital and to create jobs.” President Trump echoed those sentiments during his campaign.

In reality, when corporations repatriate offshore earnings during a tax holiday, the largest beneficiary of the giveaway is not working Americans but corporate shareholders.

There is no evidence that lowering the rate on untaxed foreign profits will result in job growth, and the history of such schemes is telling. The United States tried a repatriation holiday to create jobs in 2004. The Homeland Investment Act permitted corporations to repatriate previously untaxed foreign income at a rate of 5.25 percent instead of 35 percent (or a lower rate if a corporation complied with other provisions) in 2005 and 2006. Multinationals responded by bringing back about $312 billion to the United States.

Yet despite rules that required investment in the United States, the majority of the repatriated funds, estimated as high as $0.92 for each $1 (but as Thomas Brennan at Harvard has pointed out, most likely lower), went to stock buybacks and dividends to corporate shareholders.

Advocates for the tax reduction in Congress claimed that it would engender 500,000 jobs in two years. But as an engine of job creation, according to a 2009 research paper, the repatriation holiday of 2004 was a catastrophic failure. The idea that repatriation will spur domestic investment contains an implicit assumption that multinationals are short on cash in this country. But that’s not the case. No investment opportunities were missed by having the cash sit offshore. Instead, when multinationals moved the cash onshore, they simply gave it to shareholders.

That giveaway to corporate shareholders was not supposed to happen. The 2004 statute provided a list of permitted and prohibited uses of the repatriated money. For example, the money was to be used for job creation and not executive compensation. But a follow-up study by the Senate Committee on Homeland Security and Governmental Affairs pointed to a lack of supervision by the Treasury Department to make sure the repatriated money was used for job creation as the primary cause of the program’s failure.

“Because Congress did not require corporations that took advantage of the tax break to track how repatriated funds were used,” the report said, “it left the U.S. Treasury without a mechanism to measure compliance or prevent misuse of the repatriated funds.” Since corporations had no duty to track the funds, they did not.

Without job growth, the only meaningful benefit to repatriation would be to encourage economic growth. After all, common sense would suggest that bringing $2.6 trillion into the United States would have an effect on the economy.

In order to grow the economy, something new has to be added. But the $2.6 trillion is not new; it is already part of the economy. First, tax reform effects levels of economic activity instead of rates of growth. After the initial bumps from the incentive, the rate of growth will go back to pre-incentive rates. We achieve the same equilibrium. Since the incentive (repatriation) is already factored into the share pricing and accounted for by the corporations, the holiday will not change growth rates. (Reporting offshore profits as “permanently reinvested earnings,” which many companies do, allows companies to assume money will not come back, avoiding the need to book any expected repatriation tax costs on their financial statements.)

Next, another repatriation holiday will only encourage future bad behavior by corporations — that is, the continued squirreling away of profits overseas to avoid tax. American companies have already seen the response by the government to shortfalls. By instituting a tax holiday in 2004, the government signaled to companies that future untaxed profits could eventually be repatriated when the budget was in trouble. As a result, untaxed offshore earnings by United States companies have ballooned to $2.6 trillion. Why would we assume that corporations would not respond accordingly again?

How does lowering the rate change behavior? It doesn’t. In the tax policy world, retroactive tax cuts are the worst type: Government is giving up revenue without affecting taxpayers’ behavior in a way that improves the economy. The corporations have already engaged in the profit-making activity. They are not going to “unengage” in it even if we tax it at the full 35 percent corporate tax rate. If anything, the lowering of rates not only leaves billions on the table but also actually encourages corporations in the future to engage in the same behavior.

What is clear is that the real tax costs of repatriation are going to be high. We are forgoing tax collection on $2.6 trillion of revenues for multinational corporations. To make such a sacrifice, a clear benefit should be expected. But as we saw in 2004, repatriated earnings did not increase domestic investment, job creation or research and development.

Instead, if 2017 follows the path of 2004, we will merely redistribute taxpayer revenue to shareholders of multinational corporations, and that’s a holiday from sensible tax policy.