End the lockout on foreign earnings
By Douglas Holtz-Eakin
November 19, 2013
What could American companies do with $2 trillion? Invest, expand payrolls and create jobs. The only thing that stands in the way is the U.S. tax code.
Currently, American companies have $2 trillion in foreign earnings trapped overseas — with roughly half held as cash and other liquid assets. Instead of locking those funds out of the United States, a bipartisan overhaul could modernize the international tax rules, lower the corporate rate to 25 percent, and instill a permanent boost to hiring and economic growth. It should be at the top of the agenda for President Obama and Congress.
The need to change our tax system could not be stronger. Our current structure was built in 1986. Our economy has seen some important changes since, and companies continue to see the global marketplace as an opportunity. In fact, it is this outdated system that is preventing foreign earnings from being invested in our economy.
As any tax modernization proceeds, critics will argue that the 2004 tax “holiday” proved that eliminating the repatriation tax on foreign earnings will not lead to new investment and growth. Comparing a one-time holiday to permanent repairs is comparing apples to oranges. Modernizing the international tax rules will permit U.S. workers to compete fairly in world markets and produce a permanent benefit for the U.S. economy.
Moreover, taken at face value the argument is not supported by the data. Thomas Brennan, a Northwestern University law professor, recently released a study that takes a fresh look at the provision in the American Jobs Creation Act of 2004 that temporarily allowed U.S. companies to claim an 85 percent deduction for repatriated foreign earnings (in excess of a company’s historic average).
Brennan’s report strongly dispels critics’ claims that 90 percent of repatriated earnings were used to buy back company stock in 2005. Comparing repatriations and stock buybacks for all public companies reporting buybacks, Brennan finds it is mathematically impossible that share buybacks could have exceeded 55 percent of repatriated earnings in 2005.
Over the 2005-2009 period, for all public companies, Brennan estimates that stock buybacks accounted for just 27 percent of the use of repatriated earnings, with the bulk of the funds used for acquisitions and debt reduction and smaller amounts allocated to other purposes such as research and development, capital expenditures, and pension funding.
Along with my colleagues at the American Action Forum, I have spent years examining what bringing home locked-out foreign earnings would mean for the U.S. economy. The results are clear: Returning trillions of dollars that have been locked out from investment back to the U.S. would generate economic growth, create jobs and allow businesses to invest in critical areas like research and development.
In fact, our most recent report shows that a temporary tax holiday on foreign earnings could add up to $440 billion to the U.S. gross domestic product and create up to 3.5 million jobs, which is nearly twice the number of total jobs — 1.8 million — created in all of 2012. These numbers would have a real impact on our nation’s economy and would put a large dent in our country’s stubbornly high unemployment rate. Permanent reform to our international tax rules would lead to additional long-term growth opportunities for the U.S. economy.
Today, more than 95 percent of the world’s consumers reside outside of the U.S. For American workers to succeed in the global economy, companies need to sell their products and services on a level playing field in the international marketplace. But if those companies must pay a punitive tax to repatriate the income earned abroad, it harms their ability to equip workers with the finest equipment, expand to meet demand and reward workers for their success.
The Obama administration and members of Congress have the ability to come together and achieve a comprehensive tax overhaul that supports pro-growth policies and makes the tax code simpler and fairer. A modern tax system that ends the lockout of American companies’ earnings overseas will help to unleash the power and dynamism of America’s workers and give companies — large and small — greater opportunity to compete and succeed in today’s increasingly global economy.
Adopting a modern international tax system that allows companies to bring home the $2 trillion is going to take political leadership and compromise from both sides of the aisle. Failure to do so has a very clear implication: These dollars will be invested outside the U.S.
Should we really give the rest of the world a $2 trillion head start?
Holtz-Eakin is a former director of the Congressional Budget Office and an economic adviser to the Alliance for Competitive Taxation, a group of leading American businesses supporting comprehensive tax reform.