Congress passed the first repatriation tax holiday in 2004, accompanied by similar arguments regarding the expected surge in domestic investment. As expected, the tax holiday resulted in a large number of companies repatriating their earnings. According to a study by the Internal Revenue Service, 842 of the 9,700 businesses with foreign subsidiaries transferred a total of $362 billion from their foreign subsidiaries to their U.S. parent companies.[8]
The evidence clearly shows that these repatriated earnings did not increase domestic investment, job creation, or research and development (R&D).[9] As the authors of the leading paper on the subject concluded in 2010, “repatriations did not lead to an increase in domestic investment, domestic employment, or R&D.”[10]
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If companies that repatriate earnings do not invest those earnings in additional productive capacity or additional R&D in the United States, what happens to the money? There are many possibilities, and each company has its own story. In some cases, companies “round-trip” the money: Able to finance their capital needs adequately at home, they repatriate the funds to the United States, thereby reducing the deferred tax liability on the parent company balance sheet (the tax windfall), and then ship the cash overseas again to wherever it is needed.
Some repatriating companies may use the cash to declare a special dividend, paying out cash to shareholders. Others may buy back shares, which is effectively the same thing. The Dharmapala study noted above found that more than half the repatriated earnings were paid out to shareholders. Another study found that a firm was more likely to repatriate earnings if it had more free cash flow relative to its investment opportunities—it was more likely to repatriate if it was less likely to be capital-constrained. This study further found that such companies were more likely to repurchase shares as a way of distributing its repatriated earnings than invest it in the U.S.[11]
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The repatriation tax holiday proposal is built on three arguments, only two of which are explicit. The first argument is that many U.S. companies generate large amounts of foreign earnings through their foreign subsidiaries, on which heavy U.S. tax would be due if the funds were brought home. Of this, there is no doubt.
The second argument is that these companies would substantially increase their domestic investment if they could repatriate some of their already accumulated foreign earnings. This is unlikely, especially in light of the 2004 experience and the weakness of the nation’s economy today.
In between these two explicit arguments lies the third, implicit, argument that the companies in question have inadequate access to capital and that it is this lack alone that prevents companies from undertaking the full amount of investment they would prefer. There is no evidence that U.S. multinational corporations are capital-constrained today, just as there was none in 2004. Thus, since there is no domestic need for additional capital resources, the repatriation tax holiday would not produce a surge in domestic investment. Instead, it would likely have the same effects it did in 2004—backward-looking tax relief for international companies and their shareholders, but little in the way of new investment, economic growth, or job creation.
