How to Find a “Free” $420 Billion to Stimulate the Economy

President-elect Obama says he’ll consider any good idea to address our accelerating economic decline and help stabilize the financial system. In fact, there’s a huge, untapped resource to help do both sitting on the balance sheets of America’s multinational companies: their foreign subsidiaries are holding about $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax until the parent companies bring those earnings back to the United States. If we can get them to do just that, it could finance new jobs and new capital investment, and provide additional liquidity to our strapped financial system. It’s the closest thing to “found money” that Congress and the new Administration will ever find in the current crisis.

And we can make it happen by temporarily cutting the tax rate on earnings brought back here. In fact, we did it once before: in 2004, Congress cut the corporate tax on such “repatriated” earnings for one year from 35 percent to 5.25 percent. Along with a colleague, Aparna Mathur, I’ve looked at new IRS data to see how well the temporary tax cut worked. It increased inflows of foreign-source earnings by some $312 billion, including $252 billion by U.S. manufacturing companies. The 2004 law also told companies how they could use the new funds they brought back; surveys found that that they used $73 billion of those earnings to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt. Without the tax break, companies keep their foreign-source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes. That made the 2004 law a free lunch: it produced $34 billion in new federal revenues, including $16 billion in direct corporate tax revenues and $18 billion in personal tax revenues on income the additional jobs and higher wages supported by new funds.

We also have run the numbers to estimate what would happen if the Obama Administration tried this again. We found that it would bring back $420 billion in foreign-source income now held abroad, with $340 billion of that coming into U.S. manufacturing companies. If Congress once again limits how the money can be used, it could mean $97 billion for employment, enough to create or save 2.6 million jobs over two years. It could mean $101 billion for new capital spending, enough to increase the capital stock of U.S. manufacturers by two percent and produce long-term wage gains of 1.3 percent. It also could produce or free up $52 billion for companies to reduce their domestic debt, the equivalent of 21 percent of the bank equity infusions provided by the Treasury TARP program in 2008. Finally, the free lunch: the repatriated funds would produce nearly $45 billion in new federal revenues, split between the corporate taxes on the funds themselves and personal taxes on the additional wage income coming from the job retention or creation and the wage increases linked to the new capital spending.

The economy is so depressed now that this policy may not work out precisely the way it did in 2004-2005. This terrible recession shouldn’t affect how much foreign earnings come back under this policy, but it could mean that less of those funds will be used for new capital spending or jobs, at least for another year, and more will go to paying down domestic debt. Even so, the stimulus effects would be substantial, and it would actually reduce the deficit a little – and that should make it a genuine priority for the new Administration.