As the U.S. economy recovers from the Great Recession, U.S.-based multinationals continue to build large cash balances offshore. Some U.S. pundits and politicians view the offshore cash as a "holy grail" of economic stimulus. They propose a sequel to the "repatriation holiday" that Congress enacted in 2004. From a policy perspective, the original act was a bust. Let's hope that reason prevails, and Congress doesn't release the sequel.
(This will be a relatively short blog on a complicated topic that requires further elaboration.)
Tonight on CNBC, Larry Kudlow discussed a proposed repatriation holiday with Andy Stern, Former SEIU President, and Bob Lutz, Former Vice Chairman of General Motors. Interestingly, Stern -- a national Democratic figure -- argued in favor of a repatriation holiday, while Lutz -- a career industrialist -- argued against a repatriation holiday.
Stern's basic argument for a repatriation tax holiday is that 'it can't hurt to flow a trillion dollars back into the United States from offshore balance sheets.' He favors a holiday now because (i) it will probably create some U.S. jobs directly, (ii) it will help some multinationals shore up underfunded U.S. pension plans, and (iii) although much of the cash may be used for dividends and share buybacks, some of the dividends/buybacks will be taxable, increasing tax revenue to desperate federal, state and local governments.
Lutz argued that the 2004 holiday failed to stimulate the economy or create jobs. Moreover, Lutz noted that the 'trillion dollar' figure is an exaggeration. On that point, Lutz emphasized that the "strings attached" to a tax holiday would deter many corporate executives from repatriating cash. (A current proposal, H.R. 1834, would effectively penalize corporations that repatriate cash without maintaining existing U.S. employee headcounts.)
I'm on Lutz's side of this policy debate. The 2004 holiday was a total bust. Two points escaped policymakers in 2004:
First, cash is fungible. Although multinationals repatriated cash to the United States, they did not use the "offshore cash" to expand their U.S. business activities. They shored up pensions, and they increased dividends/buybacks, but those uses of cash did not have a stimulative impact on the overall economy. (Technically, a multinational that repatriated cash was required to implement a "domestic reinvestment plan" or "DRIP" to document use of the cash within the United States. Economic analysis suggests that the DRIPs were droops.)
Second, a huge amount of offshore cash was (and is) controlled by multinational tech and pharma companies (think Cisco, Microsoft, Pfizer). Although the tech and pharma industries are robust engines of growth, they have low external leverage ratios and are not cash constrained in the United States. If they want to build factories or hire employees, they have existing sources of financing to achieve those objectives.
Unlike the tech and pharma industries, America's small- and mid-size business managers are not sitting on buckets of offshore cash. Another repatriation holiday may have some indirect benefits for these businesses, but no direct benefits. It's simply not the "holy grail" that its advocates would suggest.
We need fundamental corporate income tax reform, including lower tax rates on all business income. A tax holiday would make reform more difficult, because repatriation is a significant lever in the overall policy debate. Let's hope Congress leaves the sequel to 2004 on the cutting room floor.