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Tax Holiday on Repatriated Corporate Earnings Would Increase GDP, Create Jobs

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October 14, 2011
Press release

Study examines how firms would respond to a major tax change, and deploy the estimated $1.4 trillion in earnings currently overseas directly and indirectly into the larger economy

A new economic study commissioned by the New America Foundation and performed by Dr. Laura D’Andrea Tyson, special advisor to global expert services and consulting firm Berkeley Research Group, LLC and New America board member, and Dr. Kenneth Serwin and Dr. Eric Drabkin, directors at BRG, assesses the effects of a one-time reduction in the tax rate applied to the repatriation of foreign subsidiary earnings on spending, output, and employment in the U.S. economy.

“Our study evaluates the interplay between finance and macroeconomics, and the economic incentives and overall implications of the return of repatriated earnings to shareholders,” said Dr. Serwin, a Ph.D. economist whose recent research focuses on the role of foreign direct investment in the geographic distribution of firms’ business activities.

U.S. multinational companies hold an estimated $1.4 trillion in foreign earnings overseas, an amount that has been growing and will continue to grow without a change in the current corporate tax structure. Thus, the opportunity cost of a tax reduction on the repatriation of these earnings is low; without such a reduction, most of these earnings will not come back to the U.S., will not be subject to the U.S. corporate tax, and will not be available to boost consumption, investment, and employment through the channels identified in this paper.

The Tyson/Serwin/Drabkin study finds that a temporary reduction in the tax rate on the repatriation of foreign subsidiary earnings to approximately 5.25% would lead to a significant increase in repatriations, making $942 billion available for domestic use by U.S. multinational corporations. This increase in turn would lead to an increase in capital spending by capital-constrained firms and an increase in consumption spending by shareholders. Using a range of multipliers from several macro models, the authors estimate that the expected increases in consumption and investment spending would have the following effects:

  • An increase of $178 billion to $336 billion in GDP;
  • An increase of 1.3 million to 2.5 million jobs; and
  • An increase of $36 billion in corporate tax revenues.

“We think that a temporary tax reduction on repatriations would also be a beneficial interim step on the path to comprehensive corporate tax reform to reduce the corporate tax rate, broaden the corporate tax base, and move toward a territorial system,” said Dr. Tyson, a member of President Barack Obama’s Council of Jobs and Competitiveness. The S.K. and Angela Chan Professor of Global Management at the Haas School of Business, at the University of California Berkeley, Dr. Tyson was a member of President Obama’s Economic Recovery Advisory Board. She served in the Clinton Administration and was the Chair of The Council of Economic Advisers (1993–1995) and the President’s National Economic Adviser (1995–1996).

The study finds that growth in employment and output, as well as the potential for stock market gains likely to result from the repatriation and return of cash to shareholders, would boost business and consumer confidence. 

“Our analysis shows that even if a significant proportion of the repatriated earnings were distributed to shareholders in the form of dividends and share repurchases, a notable increase in private spending and economic activity would result,” said Dr. Drabkin, whose research projects include several on IMF macroeconomic stabilization programs.

The full study is available here.

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