"Bring It On Home
- How to get capital stashed abroad
back to the U.S
"A common political gripe is that
American Corporations take business and jobs a way from U.S.
shores. Here's a radical thought: How about fixing the parts of
the tax code that encourage them to keep their cash overseas?
That's the point of a proposal gaining traction in Congress to
allow a one-year, tax reduction on corporate income earned abroad.
Instead of the usual U.S. tax rate of 35% that businesses pay on
income earned by their foreign subsidiaries, companies would pay a
5.25% rate if they repatriate that income during a 12-month
period.
"We aren't usually fans of temporary
tax proposals, and a broader reform that makes U.S. corporate
taxes more competitive with the rest of the world would be
preferable. But you can squander five lifetimes waiting for
Congress to pass tax reform, and this idea would at least provide
a one-time economic and revenue boost. It would also move the U.S.
in the sensible direction of what's called a 'territorial
tax.'
"The U.S. is currently a rare
country that taxes income earned anywhere at U.S. rates. Most
countries allow income to be taxed in the places
("territory") where it's earned. The U.S. has tried to
compensate by offering corporate tax credits for income earned and
taxed abroad, but those credits have many restrictions and limits.
The practical effect is that law-abiding American companies hold
abroad tens of billions of dollars on which they've already paid
foreign taxes and refuse to repatriate lest they get taxed again
at that 35% U.S. rate.
"A 12-month tax window would induce
companies to bring much of this cash home, by one estimate (a J.P.
Morgan study) $300 billion or more. As a matter of federal
revenue, a 5.25% tax on $300 billion certainly beats 35% of
nothing. And that's before any growth effect at home from
investing that returning capital. A study by economist Allen Sinai
estimates a boost to GDP of 0.2% in 2004 and 0.9% in 2005, along
with increases in jobs and capital spending, from the proposal.
"Such estimates are always
speculative, but it's fair to say U.S. companies wouldn't stuff
that returning capital in a mattress. They'd invest it to increase
domestic productivity and employment, or perhaps use it to reduce
debt or to pay higher dividends. Especially given the current
concern about American jobs moving to India and China, any
proposal that gives companies an incentive to bring work home
should be taken seriously.
"One objection is that it would
encourage U.S. companies to keep future earnings abroad because
they'll anticipate another one-year tax reprieve some years hence.
This is the reason Congress's Joint Tax Committee scores the
proposal as losing $4.4 billion in revenue over 10 years. We're
delighted Joint Tax has finally discovered that taxpayer behavior
changes as tax rates do. But the 35% U.S. corporate rate is
already a large enough incentive to keep cash abroad. The best tax
policy would be to turn the one-year lower rate into a permanently
lower one, but even one year is better than current policy.
"A large Senate majority is already
on record supporting the one-year tax reprieve. House Ways and
Means Chairman Bill Thomas has supported something like it in the
past, albeit at a 7% instead of 5.25% rate, but recent word is
he's kept the provision out of the overseas tax bill he is moving
through his committee this week. We hope he reconsiders, or that a
conference committee restores it. There's no reason other than the
crazy U.S. tax code that a dollar earned abroad shouldn't be spent
at home."
Making Sense of It All