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Giving tax breaks to encourage US firms to repatriate income to create jobs didn't work before

A big reason why Wall Street has risen to all-time highs is the promise of a "phenomenal'' tax plan by president Trump. However, other than that promise which was made more than a week ago, no details have been forthcoming though much of the speculation has centred on a proposal to give US companies a tax incentive to repatriate their profits instead of keeping the money offshore. The current US corporate tax rate is 35%, which is one of the highest in the world, so hopes are than if the new administration was to offer a major concession, say a rate of 5% US firms will bring their money home, thus boosting investment and creating jobs (don't forget Trump's other promise of creating 25 million new jobs).

It all sounds good on paper, but it appears that markets have very short memories. Few readers might remember this, but the Bush administration in 2004 passed the American Jobs Creation Act (AJCA) which permitted US corporations to repatriate income held outside the country at a rate of 5.25% instead of 35%. The purpose was "to encourage companies to return cash assets to the United States, which proponents of the AJCA argued would spur increased domestic investment and US jobs''. How successful was this move? In 2011, the US Senate Permanent Subcommitee on Investigations reported that "in response, corporations returned US$312b in qualified repatriation dollars to the US and avoided an estimated US$3.3b in tax payments, but the growth in American jobs and investment that was supposed to follow did not occur''.

The investigation found that more jobs were actually lost than gained (the top 15 repatriating companies reduced their overall US workforces by 20,931 jobs, while studies of all 840 companies found no evidence of more jobs. There was also no evidence found that more money was invested in R&D; instead, the money went into share buybacks, higher executive salaries and increased dividends - all this despite express clauses that the money could not be used for these purposes.

"Repatriation primarily benefited a narrow slice of the American economy, returning about US$140b in repatriated dollars to MNCs in the pharmaceutical and technology industries, while providing no benefit to domestic firms that chose not to engage in offshore operations and investment'' said the Senate report. The investigators also found that most of the money that came back was from tax havens and that offshore funds actually increased.

Market voices on:

The conclusion: "The 2004 repatriation cost the US Treasury and estimated net revenue loss of US$3.3b over ten years, produced no appreciable increase in US jobs or research investments, and led to US corporations directing more funds offshore. The Report recommends against enacting a second corporate repatriation tax break due to the harms associated with a substantial revenue loss, failed jobs stimulus and added incentive for US corporations to move jobs and investment offshore''.

Interested readers can Google "Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals'' Majority Staff Report, Permanent Subcommittee on Investigations,  United States Senate.
If the 2004 move was such a dismal failure, why consider it again? Or perhaps the better question is - how is it that markets have overlooked these findings? I suspect that the report was buried under the rubble created in the aftermath of the sub-prime crisis, with lawmakers more concerned with the Fed's actions to save the country's crooked banks. Since that bailout took many years to accomplish, an obscure report that didn't gel with expectations was conveniently forgotten.

In any case, traders here should take note of those conclusions, and the very real likelihood of a) history repeating itself if Trump tries to resurrect a tax incentive on repatriated income and b) a "buy in anticipation, sell on news'' play occuring over the next couple of weeks when the "phenomenal'' tax plan is finally revealed.