Money earned abroad by American corporations is free from U.S. taxes until it is returned to the United States. However, once these foreign earnings are repatriated, they are taxed at a rate of 35%. The current tax code allows multinational companies to avoid this tax, but only if they invest in certain domestic assets such as bank deposits, stocks and bonds. If the foreign earnings are reinvested into the companies themselves, they are taxed at the corporate tax rate of 35%. Currently, a group of multinational companies who have joined together to form what is called the Win America Coalition, is lobbying Congress to reduce the tax rate on earnings they bring home from overseas. This group of companies, which consists mainly of the Silicon Valley technology giants together with some pharmaceutical companies, is asking for the tax rate on repatriated foreign earnings to be reduced from 35% to just over 5%. They claim that a reduction in the tax rate would increase hiring and stimulate job growth by allowing companies to invest in themselves. While some members of both major political parties are in favor of such a tax cut, others are against it. The pros and cons are outlined below.
Reasons for favoring a tax cut on repatriated foreign earnings:
• Due to a flawed U.S. tax code, profits of U.S. companies continue to be invested around the world instead of at home.
• Even though companies are allowed to keep funds earned abroad in U.S. banks, they are not able to put the funds to work in the U.S. economy without being subjected to a 35% tax rate.
• Reducing the tax rate for repatriated funds earned abroad would inject billions of dollars into the U.S economy, thus creating jobs.
Reasons for opposing a tax cut on repatriated foreign earnings:
• Domestic companies that do not have overseas operations say it is unfair to give multinational companies a lower tax rate.
• Some analysts say that job growth created by a tax cut would be lower than some estimates predict because foreign earnings are already invested in U.S. stocks and bonds and deposited in U.S. banks.
• Independent tax analysts have said that when a similar tax cut was initiated in 2004, most of the repatriated funds were spent on shareholder dividends, stock buybacks and executive pay rather than on any type of expansion that would have created jobs.
According to recent report by the Senate’s Permanent Subcommittee on Investigations, large multinational companies are already investing nearly $250 billion in United States financial institutions in order to avoid paying the 35% tax rate on repatriated foreign earnings. The question is whether a reduction in the current rate would promote changes in the distribution of these funds that would be beneficial to the economy.
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