The Republican tax bill includes a provision allowing corporations to pay a significantly lower tax rate on monies they hold overseas, much like the tax holiday offered under the George W. Bush administration in 2004.
Repatriation has been billed at times as a practice that encourages corporations to bring their money home, where it will be subject to tax and be used to benefit the U.S. economy.
While this might ring true in the short term, with tax collected and cash to spend at home, history shows that the benefits are not long-term; rather it encourages corporations to keep their cash offshore, teaching them that if they do, they can expect a nice tax break when they bring it back.
The bill would take currently untaxed profits of US companies being stored abroad — profits that would normally be taxed at a 35 percent rate upon being brought back to the US — and tax them at new ultra-low rates: 8 percent for profits invested in real estate and other hard assets abroad, and 15.5 percent for profits in cash and stock and other liquid assets.
The repatriation provision in the tax bill would effectively reward companies that kept profits abroad rather than pay the 35 percent US corporate tax rate on them. That doesn’t raise money — and, what’s more, it costs money in the long term by telling companies that storing profits overseas will be rewarded in the future.
Congress’s Joint Committee on Taxation has estimated that US companies have about $2.6 trillion in untaxed earnings overseas.
Following the 2004 repatriation, rather than use the money as the government intended (to benefit the overall economy), corporations rewarded themselves and their shareholders:
“A $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders,” Dharmapala, Foley, and Forbes conclude. Other analyses, like this one by Harvard Law School’s Thomas Brennan, are more optimistic, but even Brennan concludes that the largest corporations only used 12 percent of the money they brought back on research and development or new investment. The rest went to buying up other companies and reducing debt (both allowed under the law) and paying back shareholders through stock buybacks and dividends (not allowed).
However you look at it, a quite small share of the money went to hiring new people or making new investments or conducting new research.