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Friday, November 4, 2011

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

Donald J. Marples
Section Research Manager

Jane G. Gravelle
Senior Specialist in Economic Policy

From the start of the 112th Congress, reform of the current U.S. corporate tax system has been widely debated as an option to stimulate the economy. Most of the debate has focused on lowering the corporate tax rate and moving toward a territorial system. An exception to this approach 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. Variations of this type of proposal have been introduced in several bills, including H.R. 937, H.R. 1036, H.R. 1834, H.R. 2862, S. 727, and S. 1671 in the 112th Congress.

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. A similar provision was considered, but not adopted, as a floor amendment to a Senate version of the American Recovery and Reinvestment Act of 2009.

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 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: October 27, 2011
Number of Pages: 14
Order Number: R40178
Price: $29.95

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