The views expressed herein are those of the author and are not presented as those of the Congressional Research Service or the Library of Congress.
As the United States continues to debate tax reform, one recurring idea is tapping into the tax revenue associated with the untaxed earnings held abroad by American corporations. The general mechanics of the proposals fall into one of two categories - a repatriation holiday similar to the one offered in 2004, or a one-time deemed repatriation. The specifics get trickier as there is no consensus over what tax rate should apply (4%, 5.25%, 8.75%, 14%) how long corporations would have to pay the tax (immediately or over a number of years), what the policy regarding foreign source income would be going forward (exclusion, immediate tax, minimum tax), or what the extra revenue should be used for (lower rates at home or for investment in infrastructure).
No doubt, the amount of untaxed earnings held abroad is staggering. The most recent estimates put the figure around $2.5 trillion. But earnings held abroad is not the same as cash held abroad (a mistake the article in the previous hyperlink makes) - deferrable earnings could be held as cash and cash-equivalents, or invested in productive capital assets (machines, factories, etc). Repatriation and taxation of the former is clearly easier than repatriation of the latter. Taxing the value of productive assets could cause liquidity problems for some multinationals if the tax is due immediately and they do not have sufficient liquid resources to cover the bill. At the same time, exempting productive assets from tax would reduce the revenue raising potential of recent proposals.
So what is the split between overseas earnings held as cash versus productive assets? Professors Jennifer Blouin, Linda Krull, and Leslie Robinson, found in a 2014 working paper that 45% of earnings held overseas are held as cash, and 55% was locked up in physical capital investments. A 2015 Credit Suisse study found a slightly lower percentage of cash holding - 37%. As with most empirical investigations in the tax world, data and reporting requirements become an issue. Since U.S. corporate tax returns are private, analyses typically rely on SEC financial statements. The growing “book-tax” gap is well known so any tax-item estimates must be viewed with caution. Additionally, firms are not required to specify how they are reinvesting their earnings, so the composition must be estimated, which again introduces uncertainty. Still, these studies suggest that it is important to remember corporations are not holding all of their untaxed earnings in cash.
These findings raise important questions for the design of an actual or deemed repatriation proposal that is expected to generate a large surge in revenue. Policymakers will have to decide if they will target their plan to all earnings held abroad, or target it to liquid cash holdings. This creates a tradeoff between the revenue that could potentially be raised and the strain put on some multinationals that may not want or be able to dispose of capital assets to pay the tax. Allowing for the tax to be paid over a number of years would help reduce the tension between these two opposing forces; however, it could create a timing issue for the Treasury if the budgetary effects of a reduction in rates or an increase in infrastructure spending were to be felt before the revenue flowed in from the repatriation. Treasury could easily issue debt to cover any increase in deficits that could be repaid with future repatriation tax revenue, but then there would have to be a commitment to actually use the future revenue to pay of the accumulated debt.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Mark Keightley is an economist with the Congressional Research Service (CRS) in Washington DC. His research areas include corporate and business taxation, housing taxation, financial securities taxation, and macroeconomics. He serves as an adjunct professor in the School of Policy, Government, and International Affairs at George Mason University where he teaches graduate-level courses in macroeconomics, microeconomics, and investment. Mark was previously an associate at the Congressional Budget Office, a visiting scholar at the Federal Reserve Bank of Saint Louis, and an adjunct professor in the economics department of The George Washington University. He earned a BS in economics from the College of Charleston, and an MS and PhD in economics from Florida State University.
* The views expressed herein are those of the author and are not presented as those of the Congressional Research Service or the Library of Congress.
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