A critical part of the much-longed-for tax reform is an incentive to repatriate overseas profits, currently estimated at between $2 trillion and $3 trillion. Large multinational corporations leave these profits abroad because, after having paid the required taxes in their country of origin, repatriation would subject those profits to even more taxation in the U.S.
But Congress should resist the temptation to tell U.S. corporations, “You can have your money, but only if you spend it how we say you can.” That would be like Bernie Madoff letting you invest your money, but only if you do what he says.
Ultimately, the goal with tax reform should be to transition to a territorial tax system, taxing income only once in its country of origin, and letting the remainder return to the U.S. That’s how virtually all other developed countriesoperate. Thus our current system places U.S.-based companies at a competitive disadvantage.
However, this transition would only address future profits, not those after-tax dollars currently sitting in foreign banks. Thus Republicans also want to provide a one-time opportunity to bring those prior years’ profits back home at an attractive low rate. Something similar took place in 2004 under President George W. Bush.
In that previous repatriation effort, Democrats wanted to force companies to use those repatriated dollars to hire more workers, buy capital equipment, fund infrastructure, and other politically acceptable endeavors. So they imposed certain restrictions in an effort to achieve those ends.
Even still, Democrats later claimed that large amounts of repatriated funds were “wasted” on dividends, share repurchases, and debt reduction. This is one more example of elected officials having little or no understanding of how businesses — and the economy, for that matter — work.
There are three, and only three, significant options for companies repatriating cash:
- Business investment, such as equipment, labor, research and development, or some combination thereof.
- Repayment of debt or other liabilities.
- Return of capital to shareholders (i.e., the owners) in the form of dividends or share repurchase.
Some politicians seem to think that only one of those options — business investment — helps the economy and boosts economic growth. The Treasury Department under Bush 43 was unhappy with the fact that some companies elected debt repayment or return of capital to shareholders and tried to discourageboth actions. Sadly, such concerns were more political than economic.
For example, debt repayment may improve an overleveraged company’s financial position, allowing for future spending for business expansion. In that case, debt repayment is economically beneficial, even if the benefits are delayed.
But how can returning capital to shareholders help the economy? When a company elects to return capital to shareholders, it is, in effect, saying that it does not see investment opportunities that would return a reasonable profit. Thus returning capital to the owners will allow that capital to be redeployed in firms with better investment prospects. (It’s also worth noting that taxes are paid on both dividends and capital gains, so the feds still get their cut.) Liberating excess capital at one firm to be redeployed at another is a critical part of the capital formation process needed for economic growth.
Those who still prefer business investment over returning capital to shareholders should recognize that lowering the corporate income tax rate to 20 percent, as Republicans are proposing, would also increase investment opportunities.
Congress should cut corporate taxes. But the economy as a whole would be better off if lawmakers let individual firms, not distant bureaucrats, decide how best to deploy repatriated profits.
Wayne Stoltenberg is a member of the board of the Dallas-based Institute for Policy Innovation.