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American companies develop a diverse range of innovations on U.S. soil—new designs, cutting-edge technologies, more efficient processes, better management practices. But because many of these productivity-enhancing innovations are knowledge-based, corporations can easily transfer them to overseas affiliates at almost no additional cost. For example, best practices for management that are developed in the U.S. can be transferred to an overseas team with a mouse click or teleconference and then be implemented the next day.
Unfortunately, because the U.S. has some of the highest corporate tax rates in the developed world, U.S. multinationals have little incentive to bring back all of their profits into the U.S. economy, even though they were made possible through American ingenuity.
A discussion paper from the Society of Economic Dynamics considers the returns to the U.S. economy if U.S. multinationals fully repatriated their overseas profits. The authors tabulate overseas profits not returned to the U.S. economy between 1973 and 2014 and estimate forgone labor productivity. They find that in 2014 labor productivity would have been 5.1 percent higher in R&D intensive industries and 4.5 percent higher in IT-intensive industries.