"I listen to one side and they seem right, and then -- God! -- I talk to the other side, and they seem just as right.
-- President Warren G. Harding
I've been writing a lot about taxes lately, mostly highlighting Warren Buffett's thoughts about raising top marginal tax rates on the rich, a point I have trouble disagreeing with. But some on the other side of this argument have proposed an idea or two that I have a hard time disagreeing with as well. For example, Larry Kudlow seems spot-on here:
The [corporate] cash hoard runs around $2 trillion, about half of which is overseas. It's actually cheaper for firms to borrow and refinance their debt at rock-bottom interest rates than to pay the 35 percent tax rate on repatriating foreign earnings. Here's an idea: How about a 5 percent tax holiday to bring those foreign earnings back home?
The brilliance of this is that history shows repatriation taxes are responsible for keeping so much cash abroad that we'd likely bring in just as much, if not more, revenue by slashing these taxes than keeping them at 35%. This is a situation where the Laffer curve can probably be interpreted literally.
Now, you might ask: Didn't we try this in 2004 with the Homeland Investment Act? Yes, in fact we did. Repatriation taxes were temporarily cut to 5.25% for a year, during which time roughly one-third of a trillion dollars was repatriated, or about five times the average.
Critics of the Homeland Investment Act point obsessively to the fact that it didn't directly boost domestic investment, R&D, or employment as promised. Instead, a Harvard study concluded that "a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders."
A New York Times article from last year gives Dell
They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.
OK, but is that an obviously bad outcome? I don't think so. A company has money sitting idle where it's doing nothing good, and through an incentive it puts that money to work for its shareholders, increasing asset prices. Higher asset prices boost confidence. Higher confidence boosts investment. Investment drives recovery.
If that sounds familiar, it's nearly identical to current policymakers' goals. The current aim of monetary policy in particular is almost entirely to get idle cash moving again and boost asset prices. Here's Federal Reserve Executive Vice President Brian Sack earlier this month (emphasis mine): "[Federal Reserve] policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be."
Frankly, I'd rather have corporations add to household wealth by pumping up asset prices with their own repatriated cash than have the Fed attempt to do it with cash that's hot off the press.
According to Barron's, Amgen
What do you think? Fire away in the comments section below.
