During the most recent Republican presidential debate, I sat watching to see if a frontrunner or serious candidate might emerge among the clowns and the scandals waiting to happen. Ron Paul, the libertarian standard-bearer and stalwart champion of deregulation, whose name rarely fails to surface when election time draws near, was the only candidate to answer the questions asked of him. Not only that, he answered them in very concrete terms, avoiding the escapism so prevalent in many of his opponents’ answers.
It should have been no surprise to long-time political enthusiasts that in his answers, Paul trotted out many of his most well-known (and least popular) political ideas. He demanded that other candidates take a stand on whether the Fed ought to stick around or be shut down, he lectured on free market values versus overregulated government, etc. Of particular interest to me (primarily since it runs against common sense) was Paul’s call to end the Repatriation Tax.
Now, at this point in our development as a nation, it should never be surprising to hear a Republican candidate rattle the tax-cutting sabre every election period. No one, bleeding heart liberal or right-wing conservative, enjoys seeing his or her hard-earned money shoot straight from the paycheck to Federal coffers. Nevertheless, as with any political policy, the implications of cutting taxes ought to be examined carefully. I’d like to take a look at exactly what the Repatriation Tax is, how it stands now, and how removing it would not only result in the opposite of what Paul and his supporters want, but would also be devastating to Federal revenue and to any efforts to curb the excesses of multinationals.
Simply put, failing to tax income made outside the U.S. that comes into the U.S. would only spur multinational corporations to invest more heavily in non-regulated countries which offer no minimum wage or regulated working conditions.
First, what exactly is repatriation? Repatriation of funds refers to the movement (and especially conversion) of profits made in one country to the home country of the business or individual in question. So, for example, if I am the CEO of a large company that produces shoes and is 51% American-owned, there are many situations in which I might be earning profits in another country but would like to use them in the United States. By repatriating my company’s profits, I am able not only to pump fresh funds into the market, but to expand infrastructure in America, create more shoe-related jobs, hire desperate American workers, etc. However, some countries (America included) have a repatriation tax which applies to all such conversions and transfers. Such a tax is a disincentive to repatriate earnings and therefore to reinvest in your home country. And so, as Ron Paul and others argue, getting rid of the Repatriation Tax would become an incentive for multinational corporations to repatriate their profits and reinvest in American jobs and industries.
All of this would be well and good if what is true in theory were also true in practice. Unfortunately, Paul and his colleagues ought to reread Immanuel Kant and take another look at the chapter titled “Rational Self Interest” in their free market handbooks. First, repatriation itself usually only benefits a company or an individual when transferring funds from a higher-valued currency to a lower-valued currency. If I run a Mexican-owned company operating in the U.S. and trade $10 for 100 pesos, my spending power goes up and therefore I might be willing to pay a 10 peso tax in order to increase my spending power. While plenty of American companies might be based in economies utilizing the euro (and therefore would benefit from repealing the Repatriation Tax) many more are situated in countries where currency is valued far below that of the country of origin. So, there is little economic gain to be had in repatriating lower-valued currency into higher-valued currency, since holdings in a high-value currency will be much smaller. In such instances, a company is better off investing in the country where the lower-valued currency is earned. This would mean that, repatriation tax or not, for a multinational corporation earning money in Indonesia, it is far better to continue to invest in Indonesia and make use of Indonesian currency rather than repatriate into USD and essentially lose profits.
The second issue with repealing the Repatriation Tax is that, while It might incentivize repatriation in some specific instances, it simultaneously offers a disincentive for general production and investment domestically. This is true because, if I know I will be taxed for returning foreign profits to the U.S., I will be more inclined to invest domestically to avoid the tax altogether, or at least lessen the percentage of profits that are subject to the tax. Thus, removing the repatriation tax would offer more of an incentive to invest in infrastructure outside of the country because, knowing that any income transferred from abroad will not be taxed, no rational actor would choose to develop infrastructure and investments in those countries that have more government regulation in the way of labor laws and regulation. The results? Removing the repatriation tax would result in increased investment in countries like China, Uganda, and Indonesia, where labor is cheaper and less regulated. Profits can then be repatriated without concern that taxes will eat into any gains.
And finally, as Jared Bernstein points out, contrary to Ron Paul’s claims, “A tax holiday enacted in 2004 failed to produce the promised economic benefits.”