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Scot Lehigh

Lure overseas cash back to the US

By Scot Lehigh
Globe Columnist / October 5, 2011

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A TAX holiday on overseas profits has been tried before, with disappointing results. Now, proponents say it’s time to experiment again with giving US corporations a big tax break for bringing home the money they hold overseas.

And they’re right.

Why does that make sense, you ask?

Simply put, because of the dismal economic times and our limited options to address them. The economic recovery has slowed to the point where distant worries about a double-dip recession are now imminent concerns. Political gridlock means that the half-trillion-dollar jobs plan President Obama wants will be an uphill struggle.

Meanwhile, as much as $1.5 trillion in corporate profits hovers there offshore. That’s money that could give the tepid US economy a much-needed booster shot of cash. What’s more, with hard-pressed consumers in a penny-pinching funk and housing still stuck in a swamp, business is the sector most amenable to a jump-start. In a capital where polarization snags even small matters, this is both a big idea and one where it’s possible to envision bipartisan agreement.

If businesses were to pump their foreign-held cash into new domestic investments in plants or equipment, you’d get the same kind of multiplier effect as you do from more government spending, notes economist Douglas Holtz-Eakin, former director of the Congressional Budget Office and author of a recent Chamber of Commerce study backing the idea.

That’s one big if. When we enacted a foreign profits tax holiday in 2004, corporations used much of the new influx of cash to buy back stock and pay dividends.

“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,’’ said a Congressional Research Service study.

Opponents worry that if we go that route again, we’ll merely see a repeat of that behavior. A new study by the conservative Heritage Foundation says a tax holiday won’t produce much new investment because the companies in question have easy access to capital now. Meanwhile, the liberal Center on Budget and Policy Priorities says US corporations already have large cash reserves.

And yet, businessmen say those are overly broad generalizations.

“Not everybody is sitting on piles of cash,’’ says Chris Anderson, president of the Massachusetts High Technology Council. “And the companies that aren’t . . . will bring profits back to the US and invest in their company, in product development, or their workforce.’’

Oracle, the enterprise software company, says that almost three-quarters of its cash reserves of about $32 billion are outside of the United States. “We aren’t spending it, but the reason is that we can’t get it back to the US,’’ says Jason Mahler, vice president for government affairs. “We would increase our activity in the US if we had more access to that.’’

As part of any repatriation plan, Congress could and should call in the biggest potential beneficiaries of a tax holiday and ask them to outline what beyond-the-norm spending they’d undertake if granted such a break. Corporate leaders would be reluctant to pin themselves to public pronouncements they didn’t intend to fulfill. And after such a business-friendly, confidence-boosting move, they’d have no excuse for sitting on the economic sidelines.

Although it’s often said that money is fungible, policymakers could design the program to increase the odds that repatriated profits didn’t simply fund spending the companies would have done anyway.

Former President Bill Clinton, for example, has suggested two rates: 20 percent for any profits brought back, 10 percent for funds reinvested “in increasing employment in America.’’

The Congressional Research Service, meanwhile, suggests tying any such tax break to an increase above the company’s recent level of employment, wages, or investment.

Even at a much-reduced tax rate, the repatriation of profits would generate some new revenue in the next few years (though it would be a net revenue loser over a decade). Some Democrats, including New York Senator Charles Schumer, are reportedly open to the idea as long as new tax revenue would go to fund an infrastructure bank, which could further increase employment.

In short, a repatriation tax holiday is a gamble. But if properly done, it’s a gamble worth taking in these dreary economic times.

Scot Lehigh can be reached at lehigh@globe.com.