As the Trump administration and Congressional Republicans attempt to overhaul the U.S. tax code, one focal point will be how to “repatriate” the $2.6 trillion of overseas profits accumulated by U.S. corporations. Given how we talk about these earnings, you could be forgiven for thinking U.S. companies have stashed their cash inside a mattress in France. They haven’t. Most of it is already invested right here in the U.S.
To clear up a common misconception, ”repatriation” is not a geographic concept, but refers to a set of rules defining when corporations have to pay taxes on their earnings. For instance, paying dividends to shareholders triggers a tax bill, but simply bringing the cash to the U.S. does not. Indeed, nearly all of the $2.6 trillion is already invested in the U.S.
Proponents of the Republicans’ Big 6 Framework are fond of arguing that “bringing earnings home” will increase funds available for domestic investment and growth. That’s not only illogical—it’s disingenuous. Here’s why:
U.S. multinational corporations can defer paying tax on profits they earn abroad indefinitely by agreeing not to use the earnings for certain purposes, like paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the U.S. In short, the rules prohibit a company from using pre-tax money in transactions that benefit shareholders. No one believes this is rational or efficient, and it is certainly onerous for shareholders, who would rather have that cash in their pockets than held by the corporation. But those rules don’t place requirements on the geographic location of the cash. Multinational firms are allowed to bring those dollars back to the U.S. and to invest them in our financial system.
Indeed, that’s exactly what they do. Don’t take my word for it, the financial statements of the companies with large stocks of overseas earnings, like Apple, Microsoft, Cisco, Google, Oracle, or Merck describe exactly where their cash is invested. Those statements show most of it is in U.S. treasuries, U.S. agency securities, U.S. mortgage backed securities, or U.S. dollar-denominated corporate notes and bonds. As Apple, Inc. states in its annual report: “The Company’s cash and cash equivalents held by foreign subsidiaries are generally based in U.S. dollar-denominated holdings.” Microsoft’s annual report states that more than 90 percent of its $124 billion in deferred cash was invested in U.S government and agency securities, corporate debt, or mortgage backed securities. Those examples are typical. Of the 15 companies with the largest cash balances—companies that hold almost $1 trillion in cash—about 95 percent of the total cash was invested in the U.S. (We examined the annual reports of Apple, Microsoft, GE, Google, Cisco, Oracle, Amgen, Ford Motor Co., Gilead, Qualcomm, Merck, Amazon, Pfizer, IBM, and Johnson & Johnson.)
So all those so-called “unrepatriated” earnings are right here in our financial system, and through our financial system, they’re making loans to home buyers, small businesses, and growing corporations. They’re already helping to build U.S. capital and helping the U.S. grow.
For this reason, the term “repatriation” is misleading. Since the cash is already here, a more accurate definition would describe a shifting of dollars from the company’s bank account to its shareholders’ accounts. Sure, the Treasuries or mortgage securities held by companies might change hands, but that does not change their total amount. Shareholders might prefer that exchange, but if the goal is to increase the level of investment in the U.S., this strategy is as futile as trying to raise the water level in a pool by moving water from one end to the other.
The fact that the these overseas profits are already invested in the U.S. is a primary reason why the last repatriation holiday in 2004 failed to increase investment or employment at participating firms. The repatriated income was used for share repurchases and dividends, but it did not boost growth or benefit the American worker
So how can we fix this moving forward? In every version of tax reform on the table, there will no longer be an incentive, nor an opportunity, to hold untaxed earnings. In the likeliest outcome, foreign earnings will be taxed when earned a specified rate and repatriated without further consequence. In the transition to that new system some mandatory repatriation will be necessary to clean the slate. But how can we make sure the $2.6 trillion in unrepatriated earnings benefits American workers and not just shareholders?
To start with, we should avoid another 2004-style tax “holiday” or other mechanism that allows companies to repatriate income at a reduced rate. While the repatriation of cash itself cannot increase growth, imposing a high tax rate on those earnings would raise a lot of tax revenue. And we could use those revenues to pay for lower rates elsewhere. The untaxed cash on corporate balance sheets is the product of decisions that happened years ago; imposing a high tax rate would place no burden on investment going forward. While the revenue would be temporary and non-recurring—and thus could finance only limited permanent tax cuts elsewhere—it is otherwise an ideal source of revenue to help pay for lower rates on American workers or targeted incentives for new investment, which could help growth in the future.
Other companies have regularly paid the full 35 percent on their domestic earnings and on cash they have repatriated in the past. There’s no principled reason to treat the few dozen companies with large stocks of untaxed earnings more favorably. In fact, those companies are likely to benefit most from corporate tax reform. Taxing their profits at a substantial rate would be a fair and efficient way to make this problem go away. Once we’ve done that, we can focus on what matters: how to use that revenue to actually help the American worker.