One of the points of the business tax plan that President Trump campaigned on was a provision that would permit companies to repatriate earnings held overseas at a one-time reduced rate of 10%:
“It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.”
This type of tax holiday is not new. In 2004, Congress enacted the American Jobs Creation Act (AJCA), commonly referred to as the “2004 Tax Holiday.” Under the Act, 843 U.S. firms repatriated a total of $300 billion at a reduced rate of 5.25%. It is important to note that to be eligible for the lower rate, the earnings had to be invested domestically.
The jury is still out as to whether the $300 billion that was brought back home created jobs in any significant way. However, one thing is clear: the temporary tax holiday did not appear to slow companies from continuing to stash earnings overseas. As discussed in our recent report, Indefinitely Reinvested Foreign Earnings – Balances Held By the Russell 1000: An 8-Year Snapshot, these untaxed earnings have increased dramatically over the last eight years, topping $2.4 trillion as of 2016.
To illustrate, consider the following 10 companies, which repatriated the most funds under the AJCA. At $116.2 billion, they accounted for almost 40% of the total brought back.
However, as one can see from the table above, these same ten companies now have over $400 billion in untaxed overseas earnings.
While we do not have sufficient information to determine whether the proposed tax cut would create additional jobs or – as some critics suggest – whether it would just be used for buybacks and corporate dividends, to have a long-lasting effect on the balance of earnings kept overseas, the suggested tax policy should include more than just another “one-time” holiday.