Fed paper says repatriated profits going mostly to shareholders
WASHINGTON: US companies encouraged by tax-code changes to bring home hundreds of billions of dollars in profits held abroad are so far returning that money to shareholders rather than plowing it into expansions, innovation or other forms of investment, new research from the Federal Reserve showed.
“Funds repatriated in 2018:Q1 have been associated with a dramatic increase in share buybacks,” Fed economists Michael Smolyansky, Gustavo Suarez and Alexandra Tabova, wrote in a paper posted this week on the central bank’s website.
Evidence of an increase in investment is less clear at this stage, as it is likely too early to detect given that the effects may take time to materialise.
The tax overhaul signed into law by President Donald Trump in December gave companies incentives to bring money back to the US by lowering the tax rate on repatriated profits.
The new rules set a one-time rate of 15.5% on cash and 8% on non-cash or illiquid assets. Previously, companies had to pay the old 35% corporate rate, but only if they brought the money back to the US.
The Trump administration sold the tax cut package as a way to lift the US economy out of a post-recession period of moderate growth and boost wages of American workers. While the economy has accelerated, unemployment has fallen and stocks are near record highs, there has yet to be much of a bump up in inflation-adjusted wages.
According to the Fed’s paper, balance of payments data showed US companies repatriated more than US$300bil in the first quarter of 2018, after averaging less than US$50bil a quarter over the past several years. The authors focused on the largest 15 firms in the S&P 500 Index, which account for about 80% of total offshore cash holdings. Share buy-backs spiked dramatically among those firms in the first quarter, just as repatriations were also surging.
At the same time they found “no obvious spike in investment among the top 15 cash holders in 2018:Q1 relative to the previous quarter.” The authors noted, however, that investments have a seasonal element and that first quarter figures were up somewhat for the top 15 firms over investments in the first quarter of 2017, and not for other firms. — Bloomberg