Recovery on hold with profits overseas (revised)

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, these profits have not translated into growth.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.

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Many think that the economy isn’t recovering like is has in the past because there is money just sitting on the sidelines.  One way to get that money working would be to institute an electronic currency, removing the zero lower bound on interest rates by removing 0% interest on paper money, and instituting negative interest rates to draw the money out.  Unfortunately, the paradigm shift needed on the part of the public for this to take place isn’t going to occur anytime soon.  I personally think that such a shift will most likely come from a popular cry for relief from inflation as opposed to breaking the zero lower bound, since the change would be more appealing to the public then.  With electronic money and the removal of the zero lower bound firmly in the future, the United States is in need of something that can help now.  Companies like Apple, Google, and Exxon Mobile are hoarding their profits overseas (an estimated 1.9 trillion in May 2013).  The federal government should incentivize this money to come back to the US where it can work for Americans.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  Since the money is taxed as soon as it is brought into the country, there will be over a third less of it when it gets here.  Further eroding these mountains of cash is the debts taken out in order to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them.  The companies themselves would prefer the money was in the US, but current fiscal policy discourage this.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.  Apple told them as much in 2013.   In order to stimulate the growth that the United States desperately needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to taxing the profits at a lesser rate, say 10%, but also in hundreds of billions of dollars returning to the United States.  How could this be a bad thing for an economy needing further stimulation?  Opponents to this idea argue that it was tried in 2004 and didn’t lead to any tangible benefits.  While there is no guarantee the companies won’t pay healthy dividends to shareholders or pay down debt, companies will also invest some of the money in acquisitions and research.  There is a lot more money overseas now then there was in 2004, and the country wasn’t struggling to add jobs in 2004.  While opponents say it has the potential to cost the government billions in lost revenue, so does a lack luster recovery.  In addition, the analysis of the 2004 policy was done in 2011, and many positive ramifications of the investments would have been wiped out by the recession.

The money American companies are keeping overseas represent prosperity that has already been earned. The federal government may hate the idea of letting that much money in with such a small slice going in its coffers, but if the United States is going to have one of the highest corporate tax rates the world, how much of this cash does it make sense for companies even to bring back?  The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the money they are currently keeping over seas.  The existing policies should also be modified to make America competitive again with regard to corporate tax rates.  It is only driving money away from our shores (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.

One thought on “Recovery on hold with profits overseas (revised)

  1. meethoon

    Interesting blog and well organized. I wish if you have found an example of how corporate taxes are not used properly or could used differently to stimulate U.S. economy and to create jobs. But, I know my suggestion are too broad and too much to cover, so I think you did a wonderful job making your point.

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