When lonely days turn to lonely nights, you take a trip to the city lights and take the long way home. Take the long way home. You never see what you want to see, forever playing to the gallery, you take the long way home. Take the long way home. So opines the song Take the Long Way Home, written by Rick Davies and Roger Hodgson and recorded in 1978 (though not released until late 1979) by the band Supertramp.
One of the key components of this year’s tax reform legislation was a provision that taxed un-repatriated foreign earnings by American firms. The tax rate was set at a 15.5 percent for cash holdings and 8 percent for more illiquid investments. The goal was to encourage these cash hoards (estimated to be at least $3 trillion) to be repatriated to America either in the form of dividends or investment.
At a 15.5 percent tax rate $3 trillion would generate $465 million for the Treasury, and if the remainder were repatriated to shareholders or invested, the resulting effect on economic growth would be tremendous. These funds were a major reason why we had initially forecast growth of upwards of 5 percent for the economy this year.
So far; however, we have not seen a flood of capital back to the United States. According to the Bureau of Economic Analysis only about $368 billion in corporate earnings were transferred back to the US in the first quarter of 2018, or just 12 percent of the estimated total that would be subject to the amount that might be subject to the tax. We had suspected that this would occur faster, and that about half of the unrepatriated earnings would come home. But even so, it’s a big difference from what had been happening – on a quarter to quarter basis prior to the tax reform the stock of foreign direct investment had been growing at about $500 million per month (though much of this was not due to unrepatriated earnings).
One reason that the projected flood of capital has been more of a trickle is likely the fact that the Treasury Department only just put out rules on how these earnings would be taxed. One would expect that businesses would be cautious about changing their behavior prior to seeing how Uncle Sam would really decide to tax them.
The transfer of earnings back to America is a benefit to the economy no matter how the money is eventually distributed. If businesses use the capital to buy back shares or otherwise transfer profits to owners, then these earnings would eventually be saved by the shareholders either on different investments or in the form of capital gains on equities. Higher savings will help keep interest rates down and allow for growing firms to invest, or for consumers to purchase homes, appliances, cars, boats, etc.
If, on the other hand, firms use the capital to top off pensions, or to increase wages and bonuses, then the economy benefits through direct consumer spending, as workers have more money to buy more goods and services.
Of course, the best thing that firms can do for the economy, is to use these newly released dollars to invest in new plant and equipment. To date, the data do not show this happening, but that could simply be a matter of timing. So far, some of the largest companies in America in terms of market value (Apple, Google and Microsoft) appear to have repatriated about $20 billion alone. This of course, coincides with announcements of new investments in production facilities in America.
New investment in plant, equipment, technology and techniques is what drives productivity, and productivity drives both wages and economic growth. A commitment on the part of the big multinationals in production in America will keep the economy moving for some time.
Hopefully, the IRS will get it right and the new tax rules will encourage more investment, more repatriation, and even foreign investment into the American economy. If so we will see what we want to see, and begin playing to the stadium rather than to the gallery. Its better to take the long way home than to not get home at all.