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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 28, 2009

Sinai: Dividend Repatriation Tax Cut Would Be Ideal Stimulus

Op-ed in today's Wall Street Journal:  A $545 Billion Private Stimulus Plan; Let's Bring Home Foreign Earnings Without Tax Penalty, by Allen Sinai:

[T]he Obama team should implement a private-sector funded stimulus and allow a temporary reduction in the 35% tax rate that U.S. companies pay to repatriate foreign subsidiary earnings. Doing so could inject more than $545 billion into the U.S. economy without expanding the deficit.

Driven by previously strong foreign economies and a low dollar, the foreign subsidiaries of many successful U.S.-based companies have generated substantial earnings that could be invested in the U.S. economy at virtually no cost to the federal government. These earnings reside overseas, however, because of U.S. tax laws that many foreign competitors do not face.

Under the current system, U.S. corporations are charged 35 cents for each foreign-earned dollar they bring back home to the U.S. If they keep that income overseas, it is taxed at lower rates. As a result, those dollars tend to stay overseas permanently, since companies know they will automatically lose more money by bringing that income home than they can reasonably expect to make by reinvesting it once it is here. ...

In order to motivate businesses to bring this money back to the U.S., the new administration and Congress should consider legislation similar to a bipartisan 2004 law, The American Jobs Creation Act. This law incentivized U.S. businesses to bring $360 billion of foreign subsidiary earnings back into the U.S. at a reduced corporate tax rate of 5.25% for one year. A survey of several hundred of these companies found that they used, on average, 25% of those funds for U.S. capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction.

A similar opportunity exists now as then, with an even greater need today. A new study by Decision Economics Inc., concludes that lowering the tax on repatriating foreign-earned income would inject $545 billion into our economy. ... The study also indicates that the U.S. Treasury would receive tax revenue it would not otherwise get: an average of $28 billion per year for five years. The resulting increase in aggregate economic activity -- higher personal income, corporate profits, capital gains, Social Security and excise taxes paid -- would generate even more tax receipts. State governments would also see some increase in revenues.

For a contrary view, see Center on Budget & Policy Priorities, Repeating Dividend Repatriation Tax Holiday Would be Poor Stimulus.  See also

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I'm not sure why you assume the companies would bring back the money and invest it? Didn't they already try this in 2004? If I remember right, the tax break increased corporate profits. The problem, however, is that corporate profits are no longer tied to the welfare of the economy in the same way that we have always assumed.

As we've learned during the past decade it is, in fact, quite possible for the corporation to post significant profits, without those record profits then translating into a better living standard for employees, infrastructure investment for the future, or a more stable nation for anyone.

Posted by: Liz | Jan 28, 2009 8:05:10 PM