A new study prepared for the New America Foundation provides compelling new evidence of the numerous benefits of a temporary tax reduction on the repatriation of the foreign subsidiary earnings of U.S. multinational companies. The study was conducted by Dr. Laura D’Andrea Tyson, a board member of the New America Foundation and a special advisor at Berkeley Research Group, and Drs. Ken Serwin and Eric Drabkin of Berkeley Research Group.
The study, released today, finds that a temporary reduction in the tax rate on the repatriation of foreign subsidiary earnings to approximately 5.25% would lead to a significant increase in repatriations, making $942 billion available for domestic use by U.S. multinational corporations. This increase in turn would lead to an increase in capital spending by capital-constrained firms and an increase in consumption spending by shareholders. Using a range of multipliers from several macro models, the authors estimate that the expected increases in consumption and investment spending would have the following effects:
- An increase of $178 billion to $336 billion in GDP;
- An increase of 1.3 million to 2.5 million jobs; and
- An increase of $36 billion in corporate tax revenues.
The study reveals that growth in employment and output, as well as the potential for stock market gains likely to result from the repatriation and return of cash to shareholders, would boost business and consumer confidence which are hovering near record lows. Many economists believe that low confidence is itself contributing to the economy’s current weakness.
The analysis shows that even if a significant proportion of the repatriated earnings were distributed to shareholders in the form of dividends and share repurchases, a notable increase in private spending and economic activity would be the result.
The study also shows that a temporary tax reduction on repatriations would generate additional tax revenues at a time when the federal budget is under severe pressure. These revenues – including both the corporate taxes paid on the repatriated funds and any dividend or capital gains taxes paid by shareholders on the amounts returned to them – could be used to finance additional job-creating measures.
Like the effects of other temporary tax policies to stimulate the economy, the effects of a tax reduction on repatriations would take place gradually, occurring approximately 1-2 years following enactment of the rate reduction.
The authors argue that a temporary tax reduction on repatriations would also be a beneficial interim step on the path to comprehensive corporate tax reform to reduce the corporate tax rate, broaden the corporate tax base and move toward a territorial system.
Given the current U.S. tax structure, in the absence of a reduction in the tax rate on repatriations, the amount of earnings held abroad by U.S. companies will continue to grow and will be invested abroad. Thus, the opportunity cost of a tax reduction on the repatriation of these earnings is low; without such a reduction, most of these earnings will not come back to the U.S., will not be subject to the U.S. corporate tax, and will not be available to boost consumption, investment and employment through the channels identified in this paper.
To view the full study, go to: http://newamerica.net/publications/policy/repatriation_tax_reduction
Dr. Tyson and Dr. Serwin will hold a press call on Thursday, Oct. 13 to discuss their findings:
Date: TODAY, Oct. 13
Time: 2 p.m. ET
Participant Dial-In Number: (888) 218-7038
Conference ID # 18977650