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Bring offshore profits home—but companies shouldn't squander cash

November 11, 2017

Republicans say one of their goals in reforming the federal tax code is to encourage American companies to bring money they have stashed—legally—in off-shore accounts back to the country so it can be reinvested to boost the U.S. economy.

We think that’s a worthwhile goal.

There is an estimated $2.6 trillion in profits that companies have made in other parts of the world—and are leaving there to avoid paying hefty taxes on the earnings when they transfer the money to the United States.

Eli Lilly and Co. has some $28 billion held offshore; Cummins Inc. has $3.4 billion, according to the Institute on Taxation and Economic Policy.

The House Republican tax bill, introduced Nov. 2, would mandate that companies “repatriate” that money by bringing it to the U.S. But the legislation would give them a big tax break for doing so. Rather than paying taxes on the earnings at the current 35 percent corporate tax rate, they would pay just 12 percent for repatriated cash and 5 percent for illiquid assets such as equipment. Companies would even get eight years to pay the taxes they owe on the earnings.

Thereafter, most profits earned overseas—except those that are particularly high—would be exempt from taxation.

House Speaker Paul Ryan has said the mandatory move of profits from overseas resets the system. “That money will come back and that will help economic growth,” Ryan told CNBC.

But that’s not a given.

Studies have found that the profits companies repatriated during a tax holiday in 2004 were more likely to go into investors’ pockets than into new investments. An analysis by the Congressional Research Service found the tax holiday did lead to a “significant increase” in repatriated money but that “empirical evidence is unable to show a corresponding increase in domestic investment or employment.”

The 2004 tax holiday even included language meant to force companies to invest the money into something other than executive compensation and stock repurchase programs. But the studies concluded that “much of the repatriated earnings were used for cash-flow purposes and little evidence exists that new investment was spurred.” In addition, many firms that took advantage of the tax holiday actually cut jobs soon after.

We believe American firms can and must do better this time.

The U.S. economy is in the midst of one of the longest economic expansions in history. But with unemployment rates at rock-bottom levels, there is risk companies won’t be able to continue that growth—not unless they invest in technologies that increase productivity.

The money will be squandered if it’s simply put back into the pockets of investors. That doesn’t make the companies or the United States more competitive in the long run.•

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To comment on this editorial, write to ibjedit@ibj.com.

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