Time for “Repatriation Easing”

In recognition of the sluggishness of the U.S. economic recovery and the fact that it had already taken aggressive steps to get the economy back on track, the Fed recently announced that it would engage in “quantitative easing” (QE) to increase the money supply by buying $600 billion in government securities from the marketplace. This is expected to increase lending to businesses and drive the price of the dollar down, both helpful steps.

But while QE is welcome, it’s not enough, not when unemployment remains above 9 percent, and, as EPI points out, October’s positive job growth rate would have to continue unabated for 20 years before the economy would achieve prerecession unemployment rates. I don’t know about you, but to paraphrase William Shatner, “That’s Just Too Damn Long.”

Some argue for more direct fiscal stimulus, but for political reasons that’s off the table. So what’s left? President Obama is rightly taking the Chinese to task for manipulating their currency to boost their exports, but any action here is likely to be slow, especially given the fact that the U.S. has been timed at best in confronting chronic currency manipulators.

There is however, one tool in the tool box that has been overlooked: a temporary tax holiday for companies bringing back foreign profits to the U.S. Like QE, this would inject money into the economy, leading people to spend more, and it would spur corporate investment directly, both of which would create jobs here at home.

Under current tax law, U.S. companies can earn profits overseas that are taxed at lower rates in the countries in which they are earned. Because the U.S. corporate rate is higher than in many other nations, U.S. multina­tional firms have built up considerable profits that they have not repatriated to the United States since doing so would mean that they would be taxed at the higher U.S. rate. As a result, capital has accumulated in other nations leading to economic benefits accruing there. Allowing companies to bring this money back into the U.S. through a temporary, reduced tax rate would lead to an additional economic stimulus. Most estimates of the amount of dividends repatriated after the 2004 American Jobs Creation Act exceed $300 billion. There is no reason to expect that any less would be brought back this time, particularly given that there is an excess of $1 trillion in the profits of U.S. companies held abroad. This would be fully half of what the Treasury is injecting through QE.

Bringing back this capital, regardless of how it is used, creates a short-term economic stimulus as the money is infused into the economy. Even if companies only used the incentive for stock purchase buybacks this would still lead to more money flowing in the economy with some portion of it being spent and stimulating job growth.

But, if past experience is any basis, companies use at least a portion of repatriated money to directly reinvest in the U.S. economy. One analysis of the uses of the profits repatriated after the passage of the 2004 American Job Creation Act found that 25 percent of the repatriated funds went to domestic capital investment, while 14 percent went to R&D, both activities that not only spur economic expansion in the short run, but growth and innovation in the long run. Another study found that 36 percent of firms stated that they used the funds for capital investment, 25 percent for hiring U.S. employees, and 25 percent for R&D.

Finally, as many economists have pointed out this is not your normal recession. Not only is it a recession caused by a financial crisis – which historically have taken much longer for nations to recover from – it is a recession based in part on structural economic weaknesses in the U.S. economy. Over the last decade, the U.S. has lost millions of manufacturing jobs and perhaps as much as 30 percent of manufacturing output due to a loss of U.S. manufacturing competitiveness. To think that we can gain full recovery anytime soon without restoring U.S. manufacturing competitiveness is wishful thinking at best. One of many reasons for the U.S. loss of manufacturing is our high corporate tax rate compared to other nations. To the extent that cutting taxes on earnings that are returned to the U.S. reduces taxes paid by U.S. corporations in international competition, it will help address this tax disadvantage. They will in turn become more competitive in global markets and thereby more able to create additional jobs here at home (or forgo job losses that would otherwise occur from competitors gaining market share).

“Repatriation easing” would not only likely lead to hundreds of billions of dollars of funds coming back into the U.S. economy, it would also generate tax revenues for the Treasury because companies would be paying taxes on the money returned, albeit at a lower rate than the regular 35 percent corporate rate. While the Joint Tax Committee has argued that repatriation easing will cost more in the long run because it merely moves expected future flows of future earnings into the present, the trends after the 2004 suggest otherwise. As Rob Shapiro notes, there is no evidence that after 2004 there was a decline in repatriations.

Plus, a dollar doesn’t necessarily equal a dollar. Bringing back money from overseas when the economy is in recession is a lot more valuable than bringing back money when the economy is at full employment. The former not only spurs investment, it spurs plain old Keynesian stimulus. Moreover, getting a dollar of taxes now is worth more than getting a dollar of taxes 5 years from now, due to the time value of money. So absent more fundamental corporate tax reform, policy makers should look to “repatriation easing” as another arrow in the quiver of economic policy makers, to be applied when the U.S. economy dips into recession. Doing so now would spur growth and get the U.S. economy on the path to full recovery sooner.