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Tax Repatriation Holiday: Good For Shareholders, Not Economy

Posted on | July 6, 2011 | 1 Comment



I’m a pro-growth, low-tax sort of fella, but I call ’em as I see ’em, and the politicians that are clamoring for a tax repatriation holiday in an effort to bring home the billions in cash sitting overseas on the balance sheets of US multi-nationals are wrong in that it will lead to more domestic investment and ultimately jobs.  Jobs being the goal of any politician of course.

The reality is that these multi-nationals have plenty of cash and even if they don’t, they have plenty of access to credit markets.  Funding for the biggest companies in America is not a problem.  They have plenty of liquidity and thus if there are areas to invest and create jobs, they would do so regardless of any repatriation tax holiday.

There is one thing that a tax repatriation holiday would result in: a major increase in cash returned to shareholders. With large multi-nationals already paying out massive amounts in dividends and share buybacks, this would only increase.  As a shareholder in some of these companies, I don’t see this as a bad thing, but let’s be honest about what we’re talking about.  This will not improve the economy.  It will improve the wealth of the investing class.

Interestingly, this was done in 2004 and the conclusions have been far from supportive to the idea that it led to investment in the domestic economy and any production of new jobs.  Business Insider has a good look at the impact of the tax holiday in 2004 (read here):

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. …

…The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

Interesting, no?  The reality is that the American economy is two economies.  One for big business and one for small business.  Big business is flourishing with cheap capital and global markets.  Small business is struggling more than ever as the domestic economy weakens and increased costs of doing business.

Increased regulations in America are indirectly written by the large corporations who have a seat at the table in Washington.  Regulations often do nothing more than erect barriers of entry to small business in the markets that the large Corporations dominate.  Big business has the resources to get around and deal with regulations; small business instead gets crushed.

If you want to fix the domestic economy, forget about the cash overseas on multi-national balance sheets.  Instead, create tax holidays for new businesses that are started.  Stop taxing productive money and instead tax the executives of multi-nationals.  Unfortunately, in the class warfare rhetoric, “the rich” is a poorly used term.  A small businessman making $250,000 a year is one of the most important pieces of this puzzle.  We want him to pay zero taxes and grow his business.  The executive sitting on the board of Pepsi?  Go ahead and tax him 40%.  I don’t care.  The economy won’t be affected either way.

In the meantime, I’ll continue to work hard and invest in companies that will benefit in the economic and political system that exists – even if it is a mess.