Trapped cash

Milwaukee Journal Sentinel - - FRONT PAGE - TOM KERTSCHER

A look at U.S. House Speaker Paul Ryan’s claim about the ef­fects of the 35% U.S. cor­po­rate tax rate.

When U.S. House Speaker Paul Ryan met with Mil­wau­kee Jour­nal Sen­tinel staff on Sept. 1, an ed­i­tor men­tioned ma­jor tax cuts adopted un­der Repub­li­can Pres­i­dent Ron­ald Rea­gan in 1981. At first, Ryan joked around. “The mu­sic was bad in those days, and the tax laws were as well,” he replied, chuck­ling. “So, I think — I’m not a big ’80s mu­sic guy; I’m more of a ’70s guy.”

But the 47-year-old Janesville Repub­li­can quickly got se­ri­ous. Ar­gu­ing that U.S. taxes are stop­ping U.S.-based multi­na­tional cor­po­ra­tions from bring­ing gi­ant sums of money to Amer­ica, he stated:

We’ve got about $3 tril­lion in trapped cash over­seas that ba­si­cally can’t come back in this coun­try be­cause of our tax laws.

Ryan has made es­sen­tially the same claim a num­ber of times, in­clud­ing on Mil­wau­kee tele­vi­sion, CNBC, Twit­ter and to The New York Times.

So, do U.S. tax laws es­sen­tially pre­vent $3 tril­lion be­ing held over­seas from be­ing brought to this coun­try?

Keep the word repa­tri­ate in mind.

Tax­ing for­eign earn­ings

The ob­ject of Ryan’s crit­i­cism is the U.S. cor­po­rate tax rate. At 35%, as we re­ported in a Don­ald Trump fact check dur­ing the 2016 pres­i­den­tial cam­paign, it is among the high­est in the world — though it’s worth not­ing that, af­ter de­duc­tions, com­pa­nies typ­i­cally pay an “ef­fec­tive” rate that can be much lower.

(Trump, by the way, pledged dur­ing the pres­i­den­tial cam­paign to re­duce the rate to 15%. That prom­ise has been rated as In the Works on PolitiFact Na­tional’s Trump-O-Me­ter.)

As for the fo­cus of Ryan’s claim, he’s talk­ing about U.S.based multi­na­tional cor­po­ra­tions. More specif­i­cally, the for­eign-earned prof­its of those com­pa­nies. Here’s an ex­am­ple of how

the tax­a­tion works:

If the com­pany earns in­come in a coun­try with a 20%c or­po­rate tax rate, it would pay that 20% tax im­me­di­ately to that coun­try. If that money is then repa­tri­ated — that is, brought back to the com­pany’s U.S. head­quar­ters — the com­pany would pay an ad­di­tional 15% to the U.S. gov­ern­ment. (In other words, the U.S. tax rate of 35% mi­nus the 20% al­ready paid to the for­eign coun­try.)

So, as long as the prof­its stay parked over­seas, there is no U.S. tax on it.

Now to the specifics of Ryan’s claim.

The $3 tril­lion fig­ure

To back up Ryan’s state­ment, his of­fice cited an April CNBC news ar­ti­cle that said Amer­i­can com­pa­nies are hold­ing about $2.6 tril­lion in over­seas earn­ings and the fig­ure has been grow­ing.

That’s the lat­est es­ti­mate by Congress’ non­par­ti­san Joint Com­mit­tee on Tax­a­tion, for 2015, al­though an es­ti­mate done in July 2017 for PolitiFact Na­tional put the fig­ure at $2.8 tril­lion.

So, Ryan’s claim of about $3 tril­lion is rea­son­able.

It’s worth not­ing that the fig­ure has been ris­ing. In fact, con­sid­er­ing only the Rus­sell 1000 in­dex of large com­pa­nies, the amount of parked cash over­seas has more than dou­bled since 2008, as shown in a July re­port by the Massachusetts re­search firm Au­dit An­a­lyt­ics: 2008: $1.09 tril­lion 2009: $1.19 tril­lion 2010: $1.36 tril­lion 2011: $1.63 tril­lion 2012: $1.89 tril­lion 2013: $2.12 tril­lion 2014: $2.3 tril­lion 2015: $2.43 tril­lion 2016: $2.62 tril­lion Now to the rest of Ryan’s claim.

‘Trapped’ and ‘ba­si­cally can’t come back’

Ryan as­serts that the money is “trapped over­seas” and “ba­si­cally can’t come back” be­cause of U.S. tax laws.

To be sure, a sub­stan­tial amount of for­eign prof­its are repa­tri­ated each year.

But Ryan didn’t in­vent the term “trapped cash.” In fact, aca­demics for years have re­ferred to it as a com­monly used term to de­scribe the grow­ing amount of cash held by U.S. multi­na­tion­als over­seas to avoid, or at least de­fer, pay­ing the 35% U.S. tax rate.

Ryan’s claim is also backed by a pa­per pub­lished this month by the Na­tional Bureau of Eco­nomic Re­search, a non­par­ti­san or­ga­ni­za­tion in Massachusetts. The pa­per found a dra­matic in­crease in U.S. cor­po­ra­tions hold­ing onto cash; that the cash is con­cen­trated in for­eign sub­sidiaries of multi­na­tional cor­po­ra­tions; and that it is ex­plained by low for­eign tax rates.

News ar­ti­cles also have re­ported on the phe­nom­e­non.

In Au­gust 2016, Apple CEO Tim Cook said of his com­pany’s prof­its parked off­shore:

“We’re not go­ing to bring it back un­til there’s a fair rate. There’s no de­bate about it.”

Apple is sec­ond to Mi­crosoft in the amount of cash parked over­seas, ac­cord­ing to Au­dit An­a­lyt­ics. And as the San Jose Mer­cury News re­ported in May, the tax is such a de­ter­rent that even though Apple was sit­ting on $240 bil­lion in over­seas cash, it has con­tin­ued to bor­row money. The rea­son: The bor­row­ing cost Apple 4% or less, far be­low the 35% tax that would be paid for repa­tri­at­ing the over­seas cash.

One more point be­fore we close:

The com­pa­nies would like to repa­tri­ate the money be­cause bring­ing it back to the par­ent com­pa­nies en­ables them to do things such as pay­ing div­i­dends, do­ing stock buy­backs and in­vest­ing in U.S. oper­a­tions.

Sev­eral aca­demic ex­perts told us that some of the over­seas money, while not repa­tri­ated di­rectly back to the com­pa­nies’ U.S. head­quar­ters, is in­vested in U.S. se­cu­ri­ties. That doesn’t trig­ger the 35% tax.

Our rat­ing

Ryan says: “We’ve got about $3 tril­lion in trapped cash over­seas that ba­si­cally can’t come back in this coun­try be­cause of our tax laws.”

To avoid a 35% U.S. tax, U.S.based multi­na­tional com­pa­nies have opted not to “repa­tri­ate” roughly $3 tril­lion of their for­eign prof­its, a fig­ure that is grow­ing. That is, they don’t bring the money back to their U.S. head­quar­ters, where it can be used for things such as div­i­dend pay­ments or in­vest­ments in their do­mes­tic oper­a­tions.

But the over­seas prof­its aren’t lit­er­ally trapped and in­deed some for­eign-earned prof­its are repa­tri­ated, though they are sub­ject to the 35% tax.

Ryan’s state­ment is ac­cu­rate but needs ad­di­tional in­for­ma­tion, our def­i­ni­tion of Mostly True. Email: tk­ertscher@jour­nalsen­ Twit­ter: twit­ news Face­book: wis­con­sin

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