Why Trump's Tax Cut On Repatriated Cash Would Be Great For Investors, And Pretty Much No One Else

When Congress passed the Homeland Investment Act of 2004, issuing a one-time repatriation tax cut from 35 percent to 5.25 percent, it intended the influx of funds to bolster domestic operations and create more than a half million jobs over the ensuing years.

The actual effects were staggering. Not only did the measure fail to achieve jobs growth, but it actually catalyzed vast layoffs, according to a study by the Senate Permanent Subcommittee on Investigations. The $150 billion repatriated by the top 15 participating companies correlated with 20,931 firings, as the corporations directed their funds to stock repurchases, executive pay and M&A pursuits.

The Bureau of Economic Analysis estimated that companies repatriated around $300 billion in 2005 — a 400-percent increase over the five-year annual average of $60 billion — and each dollar contributed a 79-cent increase in share repurchases, a 15-cent boost in dividends and 60- to 92-cent pop in shareholder payments, according to the National Bureau of Economic Research. Additionally, less than 1 percent of each repatriated dollar was domestically invested.

Investors made out well. By one estimate, every $1 repatriated correlated with a near $1 payout to shareholders. But the Act didn’t do much to help the average American.

Justifying Contemporary Pessimism

Since repatriation efforts backfired before, some expect a repeat with recent proposals.

In an effort to foster jobs creation, President Donald Trump proposed last Wednesday a one-time tax holiday for American companies to bring profits earned overseas back to the United States at an unspecified rate significantly below the present 35-percent tax. Trump had previously discussed figures as low as 10 percent.

Some estimate that companies would bring back at least $1 trillion of the $2.6 trillion held outside the United States, but once again, the sum wouldn’t necessarily be spent as intended. Business advisers and S&P Global Ratings concur that any repatriated funds will be used to buy back stock, pay off debts or acquire businesses rather than expand payrolls.

Marc-Anthony Hourihan, co-head of mergers and acquisitions in the Americas for UBS, told the New York Times bankers are actually awaiting an influx of deals. “I think M&A will be fairly high on the list,” Hourihan said.

And such merger activity might undermine the effort to generate jobs, as conjoined ventures allow enhanced efficiency through layoffs. During the 2004 repatriation break, Oracle Corporation ORCL purchased competitor PeopleSoft and software provider Retek for a total $11 billion, cutting thousands of employees in the process.

Not only could Trump’s measure undercut jobs growth, but it could also inspire a swell in corporate sums held abroad. The Subcommittee on Investigations found that companies significantly increased their foreign holdings after the 2004 tax break, incentivized by the promise of future tax breaks.