Another Bogus Argument for a Repatriation Tax Holiday

Forgive me but I just had to endure some nonsense from the tax community – this time being a fluff piece from Bloomberg BNA:

Thomas J. Brennan, a law professor at Northwestern University, found that during the last repatriation tax holiday, in 2005, companies spent most of the repatriated money on cash acquisitions and debt reduction, with lesser amounts on research and development, share repurchases and dividends. That finding contrasts with an earlier study embraced by some lawmakers that estimated as much as 60 cents to 92 cents on each repatriated dollar went to shareholder payouts that were not permissible under the federal tax holiday. The earlier study's conclusion, Brennan wrote, was “completely incorrect.” … If companies could be counted on to invest repatriated money in hiring, training and other job-boosting activities in the United States, rather that paying executives or shareholders, a move to a territorial-type tax system might gain more favor with congressional Democrats.

How many things did things did Bloomberg BNA miss here? First of all – it would have been nice had the fluff piece that identified the study that Brennan suggested was incorrect and why it might have been supposedly incorrect. I suspect it was this NBER publication:

Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.

Even if the repatriated funds were spent on buying out the equity of other companies (acquisitions) or paying off corporate debt – that does not translate into more investment demand especially in the current state of the U.S. economy. Does Bloomberg BNA not get the basics here? Or do they not understand the issue is whether the repatriation tax holiday will somehow encourage more investment – even though both theory and even Brennan’s results suggest it will not? Of course, I feel compelled now to offer our readers something intelligent on this issue so let me turn it over to Stan Collender who does now how to read the serious research including this finding:

The net effect of repatriating $565 billion from overseas will be to increase the U.S. trade deficit and U.S. unemployment. There is a surplus of desired savings right now, and a corresponding deficiency in aggregate demand. Extra funds coming in to the country only add to this deficiency. I know this is counter-intuitive (wouldn't Americans have more money to spend?), but it is the actual effect of the repatriations.