Politics & Policy

Bringing Home the Capital

Let business bring foreign profits back to the U.S.—free of charge.

Reports indicate that President Obama will use his State of the Union address in part to advance a job-creating tax-reform agenda. He’s already begun, having agreed — in the December tax deal with Republicans — to a year of full business expensing. His recent outreach to corporations and trade associations suggests that a cut in the corporate-income tax is in the cards. And another pro-growth reform he should consider involves the “repatriation” of deferred foreign earnings of American companies back to the United States.

The United States, unlike most other developed nations, taxes the international income of its companies when they bring that income home. This “worldwide” tax regime is in stark contrast to most countries’ “territorial” tax systems, which tax only that business activity occurring within their borders. Therefore, a U.S. company earning a profit in Germany is responsible for paying both the German tax authorities and, should the company want to bring the money back to the United States, the IRS. There is a complex hodgepodge of deferrals and tax credits that clumsily combat this inequity.

Having the highest corporate-tax rate in the developed world doesn’t help. When factoring in state income taxes, the U.S. rate is nearly 40 percent. Suppose an American company has already paid a 28 percent corporate-income tax to Italy. Should the company want to bring the after-tax dollars back to the United States, it will have to pay the IRS the difference between our rate and Italy’s, or an additional 12 percent. For most companies, the smarter move is to not pay extra taxes, keep the money overseas, and invest it in jobs over there. The “repatriation tax” we impose is one of the most singularly stupid tax policies in existence today.

If the United States wants to be truly competitive, it should move to a territorial system, like the ones our trading partners have. This would reduce the complexity of the tax code by eliminating the need for corporate deductions and credits on international income

Congress and President Bush recognized this in 2004 when they passed the “American Jobs Creation Act.” Among other things, that law set the repatriation tax at 5.35 percent (regardless of the tax rate of the country where the business occurred) for one year. For money coming from all but the highest-rate countries, this represented a significant cut in the repatriation tax.

The result was predictable and welcome, and should serve as a blueprint for future policy. In the low-tax year of 2005, some $318 billion of deferred foreign earnings was repatriated by American companies to the United States. As a result, corporate-tax receipts rose by $17 billion that year. This money was used to pay down debt, shore up pension plans, increase wages, and create jobs.

Multiple reports indicate that $1 trillion is currently sitting in overseas deferred accounts. Another round of repatriation could be just as big, if not bigger, than the one we enjoyed in 2005. Assuming the same tax rate as then, even a $500 billion repatriation (half the amount that could be brought back) would boost the economy, like defibrillator paddles on a dying patient. Flush with cash, companies could do all sorts of good things with that money: invest in plant and equipment, raise wages, fund pension plans, create jobs, open new establishments, pay dividends, or buy back shares to help savers — the list is extensive.

The only reason not to do this is pigheaded resentment. Many on the professional Left will oppose this plan merely because they don’t want to permit corporations to do more with their own money without the government taking some. What they don’t get is that under the current system, these companies aren’t bringing this money back to the U.S. for taxation at all. The only way to get them to do so is to reduce (or, ideally, eliminate) the second bite at the international tax apple (remember that all this money is from after-tax profits earned in other countries).

This self-destructive mentality would prevent many on the left from agreeing to this proven jobs-creating plan. It should not prevent President Obama — who wants to try to repair some of the damage he and the professional Left have done to the economy before the November 2012 election — from seizing on this obvious and easy win.

Grover Norquist is president of Americans for Tax Reform.


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