Calls for a tax holiday so that U.S. corporations can repatriate some $3 trillion held by foreign subsidiaries and invigorate the domestic economy are missing a crucial point: most of that money is already invested in the U.S., just not in a way that shareholders can get their hands on it.
"We've got about $3 trillion in trapped cash overseas that basically can't come back in this country because of our tax laws," Speaker of the House Paul Ryan (R-WI) told the Milwaukee Journal Sentinelin September.
U.S. multinational companies such as Apple (AAPL) , Microsoft (MSFT) and Alphabet (GOOGL) can defer paying taxes on profits they earn abroad indefinitely, but that doesn't mean the money isn't at work in the U.S. While the companies can't use the money to guarantee U.S. loans, make domestic acquisitions, invest in physical capital in the United States or spend on dividends or buybacks, they can invest it. And what they mainly buy are Treasury bonds, effectively lending money to the U.S.
"The idea is [a company] can't use untaxed or pre-taxed earnings to do things that benefit its shareholders, but that doesn't prohibit it from actually investing money in the U.S.," said Adam Looney, senior fellow at the Brookings Institution and former Treasury Department official, in an interview.
Take, for example, Microsoft. According to its most recent annual 10-K filing, the tech company's foreign subsidiaries hold $127.9 billion as of June 30. Of that amount, 87% is invested in U.S. government and agency securities, 3% in U.S. mortgage and asset-backed securities, and 2% in corporate notes and bonds of U.S. companies. That leaves only 8% invested in foreign securities.
While that doesn't mean that the current system, which taxes earnings at the 35% corporate rate regardless of where they are from, is a good one or not costly for companies, costs are relatively small compared to the total held.
"Repatriation is likely to have a limited effect on investment in the U.S. because the unrepatriated earnings are already largely available for domestic activities," wrote Goldman Sachs analysts Alec Phillips, Blake Taylor and David Mericle in a recent note.
Unrepatriated earnings -- or rather, foreign earnings U.S. companies are deferring paying taxes on -- are already at work in the U.S. financial system, enabling loans to home buyers, small businesses and growing companies.
If corporations are allowed to "bring them back" at a lower rate for a tax holiday -- the White House has yet to clarify its numbers, but President Donald Trump campaigned on a 10% repatriation rate -- they will be able to shift those dollars to shareholders' bank accounts, but not to the broader U.S. economy, where they largely already are.
"So what repatriation would actually entail in practice is that Apple would sell its Treasury bonds to another investor," Looney, who recently published a blog post about the issue, said. "That investor wouldn't have $200 billion to finance investments elsewhere, and Apple would have cash that it would pay shareholders, but on net, it's just a matter of who held the Treasury bonds and who was doing the investing."
The most recent repatriation holiday under President George W. Bush wasn't exactly a resounding success, economy-wise. Overall job losses outweighed job gains at companies that took advantage of the holiday, with funds instead going to CEO pay raises and stock buybacks.
Many of the top firms with the most untaxed earnings either have ample cash in the U.S. or can borrow at very low rate, the Goldman analysts note, and can use financial techniques to simulate repatriation. "As a result, the direct impact on investment by firms that repatriate cash is likely to be modest," they wrote.
"You're moving your money from the left pocket to the right pocket, you haven't created new money, you've just kind of reshuffled who's holding things," Looney said. "All of that money is at work in America."
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