StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Dividend Repatriation Redux? Not In The Next Two Years.

22 Oct 2010
Posted by Pete Davis

Is there a pot of U.S. multinational money parked overseas?  Yes, approximately $2.3 tr.   Will the U.S. government temporarily lower U.S. tax rates by 85% again, as it did in 2004, so those firms will bring roughly $565 b. of it home?  No, at least not during the next two years, mainly because studies show the 2004 dividend repatriation didn't create many jobs here, and most of it went to buy back shares and to pay dividends.  The Senate rejected it in early 2009.  President Obama opposes it, and, even if the Republicans take Congress, they won't have enough votes to overcome a Senate filibuster or a veto.

The Financial Times touted the idea Tuesday, starting a lot of talk on foreign currency trading desks.
 
The Senate rejected it by 42-55 on February 3, 2009, when Senators Barbara Boxer (D-CA) and John Ensign (R-NV) proposed it as an amendment to the stimulus bill, The American Recovery and Reinvestment Act, P.L.111-5.
 
The American Jobs Creation Act of 2004 enacted the first dividend repatriation. Here's the legislative language. Firms could choose which tax year to claim it (2004 or 2005) and could claim the greater of $500 m. or the amount of earnings permanently invested outside the U.S. They had to file a plan for reinvesting the repatriated dividend in the U.S.
 
The IRS reported that 843 firms (out of roughly 9,700 eligible firms) repatriated $362 b. of which $265 b. could be used to reduce their taxable income. Pharmaceutical and computer firms, by far the heaviest repatriators, repatriated approximately 29% of the overseas earnings.
 
The Congressional Research Service analyzed dividend repatriation in this February 11, 2009 study. CRS cited two studies showing that the dividends repatriated in 2004 failed to stimulate the economy or generate many domestic jobs. Most of the money went to shareholders through share repurchases and dividend payments. See this NBER paper.  Even though the 2004 law prohibited using repatriated dividends for share repurchases and dividend payments, "money is fungible."  That is, the companies designated the repatriated dividends for the purposes required by the law, but since those uses were already being paid for, funds were freed up in like amount for share repurchases and dividend payments.
 
CRS found the 2004 dividend repatriations were heavily concentrated in a few firms: over half in the top 15 -- Pfizer; Merck; Hewlett Packard; Johnson & Johnson; IBM; Schering-Plough; Dupont; Bristol-Myers Squibb; Eli Lilly; PepsiCo; Proctor and Gamble; Intel; Coca Cola; Altria; and Motorola.
 
CRS also found that U.S. multinationals anticipate another chance to repatriate and have grown their unrepatriated earnings abroad by about 80% or nearly $1 tr. since 2005, bringing the total to about $2.3 tr.
 
On January 28, 2009,The Wall Street Journal published this op-ed by Allen Sinai in favor of dividend repatriation. He estimated that dropping the current 35% top corporate income tax rate by 85% to 5.25% for one year would bring a dividend repatriation of $545 b.
 
The Center for Budget and Policy Priorities countered with this.

The net effect of

The net effect of repatriating $565 billion from overseas will be to increase the U.S. trade deficit and U.S. unemployment. There is a surplus of desired savings right now, and a corresponding deficiency in aggregate demand. Extra funds coming in to the country only add to this deficiency. I know this is counter-intuitive (wouldn't Americans have more money to spend?), but it is the actual effect of the repatriations.


Follow the Money!

Money was overseas. In 2004, money was repatriated and used for expenses so that existing funds could be returned to shareholders. After that...
We stopped following the money.
What did the shareholders do with the money and how many jobs did they create? We stopped following the money.

Without taxes, overseas capital will be repatriated increasing the supply of capital. With taxes, some taxes will be collected reducing the deficit, but the amount of repatriated capital will shrink. The total supply of capital will decrease and interest rates will increase. Nothing crowds out private capital more than taxes on private capital.


What's the Downside?

Many of those who rail the current tax regime on income earned outside the US by US multinationals (indefinite deferral on active non-Subpart F/PFIC income) claim that those US multinationals in effect permanently avoid US tax by indefinitely keeping the profits offshore (witness recent outrage on the foreign tax rate of Google in the press recently which largely has the effect of reducing foreign, not US tax). I suspect this same group is arguing the dividend repatriation provision as proposed by Boxer et al is not good policy because it allows those multinationals a lower tax if that money is brought back now. You can't have it both ways.

Of course, the best solution would be to substantially reform the Code to eliminate this overly complex and non-sensical US tax system on US corporate foreign earnings. That reform could take one of two forms: 1) enact a territorial system like most of our trade competitors and exempt foreign income from US tax (eliminating economic distortions on the flow and investment of earnings); or 2) VERY substantially reduce the general corporate income tax rate and eliminate deferral by currently taxing worldwide income without exceptions (with foreign credit for foreign earnings). The hybrid system we now have is too complex and does not achieve any reasonable policy objective.

In the meantime, the Boxer bill was not a bad idea. Don's comment above is indeed completely counterintuitive, so much so that it is flat wrong. Aggregate US demand can't increase to the extent US shareholders' funds are locked up outside the United States because the US tax cost of repatriating them is too prohibitive. While money is indeed fungible, additional protections could be built into the bill to ensure that the repatriated funds are spent on new projects (is this any different from investment tax credits, which the administration seems to favor?). And, if you follow the money on share buybacks and dividends, I suspect a lot of those funds (to the extent not going to the US Treasury in the form of taxes) actually does get re-invested in the US or spent here. Any CFO or tax director of these multinationals who live in the real world would honestly tell you that there are significant earnings kept abroad that would be returned for investment in the US if only the tax cost of doing so was not so high. Better we do something like this than borrow Chinese funds to subsidize the purchase of Japanese cars.




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