By Geri Westphal
As the US economy continues its mostly jobless recovery, people from all sides are continuing to talk about bringing overseas cash home, aka HIA 2.0. But it won’t be easy.
With the US unemployment rate stuck at unacceptably high levels and historically high levels of corporate cash being retained and kept mostly offshore, more than a few politicians, CEOs, economists—and even a former union boss—have floated the idea of reviving the American Jobs Creation Act of 2004, otherwise known as the Homeland Investment Act (HIA). They say a new act, which has been dubbed HIA 2.0, would get companies—holding cash overseas due to US tax implications—spending again, or more specifically, hiring again. But critics say the
success of the first HIA was actually a myth and that repeating it will only help the companies and not the job picture. Can proponents counter the critics?
HIA 1.0
The first Homeland Investment Act was legislation that provided a one-time tax holiday on repatriation of foreign earnings by US based multinational corporations. The intended result was to increase domestic investment, and create more than 500,000 jobs over two years. Thus US companies were given a window of opportunity to repatriate trapped cash held overseas at a lower tax rate—5.25 percent vs. the normal 35 percent. They were also instructed on how to and not to spend it.
It is the overall ”success” of HIA 1.0 that has been widely debated and is the foundation for much of the current debate over a proposed HIA 2.0. HIA critics have mostly carried the day as many believe the program fell well short of providing a boost to domestic investment or jobs creation. According to authors, Dharmapala, Foley and Forbes, in their article titled, “Watch What I Do, Not What I Say; The Unintended Consequences of the Homeland Investment Act,” firms may not have explicitly violated the provisions of HIA, but they did reallocate internal funds differently from their original plan.
For example, firms may have used funds repatriated at the lower tax rate to pay for investment, hiring or R&D that was already planned, thereby releasing cash that had previously been allocated for these purposes to be used for payouts to shareholders; one of the activities prohibited under the guidelines of HIA. The fungibility of cash makes it near impossible to determine how exactly repatriated cash was used. What many critics overlook, however, is the fundamental nature of US international tax policy which incentivizes US MNCs not to invest the increasing share of profits earned overseas at home.
Pros and cons
Proponents of HIA 2.0 estimate up to $1tn is trapped offshore. Many predict between $400bn and $700bn would be repatriated under HIA 2.0. Based on these estimates, using the previously used reduced tax rate of 5.25 percent, repatriation could give the US government between $20bn-$36bn in tax revenue they would otherwise not realize. A white paper to be released in the new year will help shed more light on this revenue scoring question.
Plus, allowing funds to be repatriated now may add a much-needed boost to the US economy by adding billions of spendable cash flow to the financial coffers of many multinational corporations.
Cisco’s CEO John T. Chambers, agrees, writing in a recent Wall Street Journal op-ed with Oracle president Safra Catz, that by letting companies repatriate their foreign earnings—they propose a 5 percent tax rate—the president and Congress “could create a privately funded stimulus of up to a trillion dollars” as well as raise billions in federal tax revenue. Cisco has backed a proposal that would tie tax-friendly repatriation to a commitment by firms to among other things hire US workers in excess of prior year benchmarks.
Other linkages have also been proposed. Former Clinton economic advisors George Schink and Laura Tyson argued in early 2009 that repatriation would be a good way to stimulate the economy (see “HIA 2.0 as Stimulus,” IT, February 2009), especially if a repatriation tax break were tied to investment in education and training.
More recent proposals have also tied a tax break to investment in US infrastructure, including a proposed US infrastructure bank in addition to jobs (see sidebar below).
Some Union Support
In early September, former Service Employees International Union head Andy Stern for the most part came out in support of something akin to HIA 2.0. However, Mr. Stern included caveats to his plan—the government’s share of the revenue would go toward an infrastructure bank or green energy projects bank. But Mr. Stern also suggested that repatriation could come as a prelude and not a complement to a more comprehensive reform of international tax rules, as had been proposed before. “Many argue that we need to lower rates and we need to close the loopholes,” Mr. Stern wrote in the Washington Post. “But, while we wait for this argument to conclude, workers sit home unemployed and the overseas money is not put to good use in the US economy. So, let’s revisit the idea of a one-time repatriation tax break.”
Borrow vs. Repatriation
But as policy currently stands, smart companies will continue to keep—and not “hoard,” the latest label for it—foreign earnings overseas. They’d even rather borrow than bring money home.
In September, no less than Microsoft, with reportedly $37 billion in cash and short-term investments on its books, decided to sell billions of dollars in debt to fund its dividend payments.
But since most of its cash is overseas, the company felt it made better economic sense to issue debt than bring funds home. That’s because the cost of borrowing is still far lower than paying tax. This is why efforts to reduce the repatriation tax break for HIA 2.0 or place too many restrictions on use of proceeds have so far been rebuffed. Other companies, mostly tech, are in a similar position.
But those who oppose HIA 2.0 say that any reduction in taxes on repatriated funds could be considered a reward for outsourcing jobs away for the US Senator Byron Dorgan (D-ND) was quoted in a recent interview: “If we allow US corporations to once again send the money they earn abroad back to the US at a discounted tax rate, it will only lead to more companies moving their profits offshore.”
Sen. Dorgan’s position is countered by academic research that suggests that the requirement to pay US income tax repatriated earnings motivates them to invest that cash offshore. There is also the view that higher corporate tax rates in the US than elsewhere discourages investing cash here.
A good trade off
Many large multinational corporations have yet to speak up in favor of a second tax holiday, but perhaps in the current vulnerable state of the economy, they should; even if it entails making formal pledges as to what they would do with the cash. This might silence the skeptics.