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New NDN Study Shows "Repatriation" Brings Tax Revenue Gains, Not Losses
Today, NDN is releasing a new study which makes the case that "repatriation" of foreign corporate earnings has and will bring in net revenue for the U.S. Treasury. The full release, and link to the study, is below. John McKinnon has a good preview of the study in today's Wall Street Journal. I think two clear conclusions can be drawn from this thoughtful new analysis:
First, it is apparent that the way globalization is playing out makes our 20th century corporate tax system increasingly anachronistic. With the fast-rising consumption across much of the developing world, there is no doubt that successful globalized American corporations will draw increasing shares of their sales and profits from outside the United States, by competing successfully with other global companies from many other countries. Our current tax system wasn’t really built for this economic reality, and this suggests how much we need a major overhaul of our corporate tax system to accommodate how American and global business is actually conducted today.
Second, while temporary fixes are not the best public policy options, on balance enacting a new round of “repatriation tax relief” makes sense. Bringing hundreds of billions of dollars from oversees back into the US can only help our economy right now. And as our new study shows, doing so should not cost the American taxpayer over even ten years. In fact it should bring additional new revenue into the Treasury. Given this, our elected leaders in Washington should give this approach serious consideration this fall as they consider additional, fiscally-responsible steps to bolster the economy.
WASHINGTON, D.C. - A new study by NDN, a Washington-based think tank, has found that the tax provisions of the Homeland Investment Act of 2004 should end up generating net revenue gains for the U.S. Treasury, and if enacted again later this year, would be likely to do so again. The study was conducted by Dr. Robert Shapiro, Chair of NDN’s Globalization Initiative, and former Under Secretary of Commerce for Economic Affairs in the Clinton Administration, and Dr. Aparna Mathur, resident scholar at the American Enterprise Institute.
The study conducts an in-depth analysis of the Homeland Investment Act of 2004 (HIA) and current proposals to temporarily reinstate its provisions. By replicating the JCT estimating process to the extent possible and using recent IRS data in place of certain JCT assumptions, Dr. Shapiro and Dr. Mathur estimate that the 2004 HIA should produce revenue gains of $23.5 billion over 10 years, compared to the JCT’s 2004 estimate of a $3.3 billion net revenue loss over 10 years. Applying this model to current conditions and proposals, Dr. Shapiro and Dr. Mathur estimate that rather than the $78.7 revenue loss projected by the JCT, enacting a “repatriation” provision similar to H.R 1834 this year would likely bring in a net $8.7 billion over 10 years to the U.S. Treasury.
According to Dr. Shapiro: “Enacting temporary tax relief for repatriated foreign earnings in 2004 brought back several hundred billion dollars for the U.S. economy, and will end up providing billions for the Treasury. Enacting repatriation again should have the same effects at a time when revenues are scarce. While it would be better for the American economy to put in place corporate tax reforms suited to the realities of our new global economy, taking the temporary step of another round of “repatriation relief” would be a fiscally sound option that policy makers should consider in the months ahead.”
The full study is available here.
The study is based on public materials and corporate filings, including the most recent IRS data on repatriated foreign earnings following the 2004 HIA and an analysis of the JCT estimating procedures used in the 2004 proposal. Among the study’s findings:
- Companies headquartered in the U.S. repatriated significantly more money in 2004 and 2005 than was predicted by the JCT’s model. The JCT revenue estimate for the Homeland Investment Act (HIA) projected $235 billion in qualified dividends during 2004-2006, the years companies were allowed to bring back overseas-held income at reduced rates, with a sharp drop in repatriations in later years. Actual repatriations were much higher, totaling $312.6 billion in qualified dividends subject to the temporary 5.25% tax rate in FYs 2004-2006, with another $181.5 billion in dividends taxed at the standard 35% rate.
- Companies repatriated significant amounts of money at the standard 35% rate (before foreign tax credits) in the years following HIA. The JCT expected a very sharp decline in repatriations in FYs 2006-2008 and beyond from companies shifting repatriations planned for those later years into the FYs 2004-2005 time frame of the HIA. Yet, companies instead repatriated $88.3 billion in FY 2007 and $104.5 billion in FY 2008 – repatriating foreign earnings at an even higher rate than before the HIA’s enactment.
- Evidence and analysis strongly suggest that both HIA and a reprise in 2011 and 2012 would increase federal revenues, relative to the baseline of taking no new action. Using actual data on repatriations from the decade preceding the HIA, the years of its application, and the years following its expiration, Dr. Shapiro and Dr. Mathur conclude that a reprise of the HIA should revenues gains estimated at $8.7 billion over ten years, than the $78.7 billion net revenue cost projected recently by the JCT.
Dr. Shapiro has written extensively on the issue of “repatriation” over the last several years. Some additional resources:
- Study: Using What We Have to Stimulate the Economy
- One Way to Create 1 to 2 Million Jobs without Increasing the Deficit
- Some Hard Truths about Globalization and Jobs