American companies have an estimated $2.6 trillion in profits sitting untaxed overseas. As part of his tax proposal package, President-elect Donald Trump has vowed to entice them to bring that money back and invest it in production and jobs here at home.
In August, while laying out his economic agenda, he promised his administration would “bring back trillions of dollars from American businesses that is now parked overseas” so that it can be “re-invested in states like Michigan.”
But there is a very slim chance that companies will use that money to invest in jobs or the economy.
To get that money back into the United States, Trump has pledged to impose a one-time 10 percent tax rate on the profits corporations hold overseas. Currently, American companies can hold off on paying American taxes on the money they make abroad until they repatriate it, and can thus delay the tax bill indefinitely by keeping it overseas. Giving them a window where they can pay a lower tax rate could theoretically incentivize them to bring it back.
But when Bloomberg News recently asked some top CEOs what they would do with the money if they took part in the tax break, they indicated the money would go straight to wealthy shareholders. Companies can increase the value of their stock by buying back shares, thus enriching those who already hold the shares. They can also hand money directly back to shareholders through dividends.
These are the options on the minds of chief executives. “We do have various scenarios in terms of what we’d do but you can assume we’ll focus on the obvious ones — buy-backs, dividends and M&A activities,” Cisco Systems CEO Chuck Robbins told Bloomberg. Applied Materials CEO Gary Dickerson said the same thing.
This has been an ongoing feature of the U.S. economy in recent years. Big corporations have plenty of cash to spend, but rather than use it on creating more jobs, increasing pay for workers, or investing in longterm needs like research, they have overwhelmingly used it to give money back to investors. Between 2003 and 2012, large companies in the S&P 500 index spent more than 90 percent of their earnings on buybacks and dividends. Meanwhile, between 2009 and 2013, most of the money they borrowed was spent on the same purpose. That leaves very little money leftover for anything else.
All signs indicate that a tax repatriation holiday — in other words, Trump’s plan for enticing overseas profits back onshore — will only fuel this trend. Congress used this very approach in 2004, allowing corporations to bring money back and pay an effective tax rate of just 5.25 percent, and $362 billion was brought back. The legislation included a requirement that the money be spent on hiring and training workers, investing in research and development, and upgrading infrastructure, with a ban on using it for dividends, buybacks, and executive pay.
But firms were simply able to use the profits they brought back to pay for things they were already planning to spend on, and then use the money that was freed up to give to shareholders. Later academic studies would find that they used more than 90 percent of their repatriated money on buybacks, dividends, and executive compensation.
At the same time, the very same firms laid off thousands of workers. One report found that the 15 companies that brought the biggest profits back, repatriating a collective $150 billion, cut 21,000 jobs during the same period.
Another tax holiday would also be unlikely to raise significant tax revenue that could be invested by the federal government. Congress’s Joint Committee on Taxation estimates that while a second tax holiday, following the 2004 legislation, would raise revenue in the first two years, it would eventually cost the government $96 billion over a decade by giving companies a large tax break and encouraging them to stash more profits overseas in anticipation of future tax holidays.