Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis

Donald J. Marples
Specialist in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

At the beginning of the 111th Congress, economic stimulus proposals have dominated the legislative agenda, with a broad recognition that business tax incentives are among the policy options to consider. Two prominent proposals, H.R. 1 and S. 1, both titled the American Recovery and Reinvestment Act of 2009, were the focus of this debate. Both proposals include business tax incentives which would increase the after-tax rate of return on domestic investment and were subsequently enacted in P.L. 111-5. In contrast, little attention has been given to international policy options. An exception to this is a plan to reduce the tax rate on repatriated dividends that has received some consideration. Under such a plan, the U.S. tax that U.S. firms pay when their overseas operations remit ("repatriate") their foreign earnings as dividends to their U.S. parent corporations would be reduced. This provision was considered, but not adopted, as a floor amendment to a Senate version of the American Recovery and Reinvestment Act of 2009. 

A conceptually similar proposal was enacted as part of the American Jobs Creation Act (P.L. 108- 357). The provision provided a temporary reduced rate for repatriated earnings, with the condition that the repatriated earnings be used for domestic investment. While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment. 

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be partially offset by exchange rate adjustments that would reduce net exports. In addition, how businesses use repatriated earnings will impact the stimulative effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect if they are used to increase current investment. A smaller stimulative effect will result, in contrast, if the repatriated earnings are used to shore up "cash-flow" issues.


Date of Report: March 4, 2010
Number of Pages: 11
Order Number: R40178
Price: $29.95

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