Budget conference should skip the repatriation holiday
The ongoing budget conference between the House and Senate gives Congress a rare opportunity to get spending under control. Conferees should focus laserlike on achieving that goal. They should not allow themselves to be distracted by policy concerns unrelated to spending.
One bright, shiny object now tempting conferees to take their eyes off the ball is the prospect of helping American businesses avoid — temporarily — the considerable tax burden inflicted on them by our antiquated “worldwide system” that applies to their foreign earnings.
Certainly relief from excessive taxation is a desirable goal. The worldwide system is badly out of step with the rest of the developed world and is long overdue for repeal. It suppresses domestic investment by U.S. businesses, which reduces jobs and wages for American workers.
Some have suggested that the conference should establish a “repatriation holiday” to temporarily circumvent the worldwide system. It would allow businesses to bring their foreign earnings back home, at a substantially reduced tax rate.
U.S. companies currently are holding abroad an estimated $2 trillion in foreign earnings. The idea behind the holiday is to encourage companies to bring that money here, where it would be invested in ways that create jobs and grow the U.S. economy.
The instincts of those pushing a repatriation holiday are good. But even if it weren’t a distraction from the much-needed work to curb spending, it would be a bad idea. In practice, a repatriation holiday won’t serve its intended purpose.
Congress tried a repatriation holiday in 2004. It failed to boost investment then, for the same reason another holiday would fail today. U.S. businesses weren’t cashconstrained in 2004. They had plenty of domestic earnings, and credit markets offered ready access to capital at reasonable interest rates. If companies wanted to invest, nothing was holding them back.
Consequently, when companies repatriated money, they didn’t invest it in expansion. Instead, they paid dividends, bought back shares or acquired other businesses. There is certainly nothing wrong with these activities, however their direct impact on investment, and therefore job creation, is minimal and uncertain.
Today, businesses are no more cash-constrained than they were in 2004. If offered another “holiday,” they would likely use the funds the way they did in 2004 — with the same negligible impact on investment and job creation.
Because money is fungible, there is likely no way to force businesses to use repatriated funds on any particular purpose, such as investment. Nor should Congress try to dictate what a business does with its earnings.
Moreover, a repatriation holiday would do nothing to increase investment going forward. It deals only with previously earned profits — funds that businesses have already decided how to invest or distribute.
Yes, changing the tax treatment of those previous earnings would provide a windfall to businesses. Wiping out a big chunk of tax liability would surely strengthen their financial statements. But it doesn’t change their incentives for future investment. A holiday leaves the worldwide system in place — providing temporary relief from the symptoms, but doing nothing to cure the underlying problem.
What’s needed is a system that increases the incentive for businesses to invest. Abolishing the worldwide system and replacing it with a territorial system would do the trick.
The House Ways and Means Committee is hard at work trying to do just that.
Though linked in many people’s minds, a territorial system and a repatriation holiday are very different. The inevitable failure of a holiday would discredit the more effective territorial system and make implementing it more difficult.
Those who want to free businesses to invest more — to create jobs and raise wages — should focus on helping the Ways and Means Committee establish a territorial system outside the budget conference.
Meanwhile, the budget conferees should focus on dealing with the problem that poses the greatest threat to our nation’s economic growth: excessive government spending.