It’s no secret that corporations send their profits where they operate most efficiently for their owners. In other words, much of those profits find their way to tax havens where they pay little to no income tax. For the United States, there is an estimated $2.4 trillion to $3 trillion sitting offshore and being invested in other countries. Someone is getting the benefit of all that money, but it isn’t the US. Repatriating that money – bringing it back home – is a key issue of the Trump administration.
In order to discuss the merits of repatriating offshore funds, it is first necessary to ignore the silliness of emotional arguments that corporations are just being greedy and unpatriotic in moving money offshore. Corporations are simply attempting to get the greatest returns on capital for their shareholder owners. They are functioning as they are supposed to and acting in the best interest of shareholders. And, lowering tax rates for corporations in order to keep the money in the US, or to bring it home, aids to the benefit of everyone participating in the economy.
Trump, and the Republicans have been working to reduce the federal corporate income tax rate to 15%. Because the current 35% rate – one of the highest in the world – encourages money to flow offshore, it makes sense that reducing the rate to 15% creates some incentive to keep the money within the US. The lower rate is still higher than many nations, and it is certainly higher than the 0% figure in some nations, but at some level, it makes sense for some corporations to either keep their profits in the US, or to repatriate offshore money. It isn’t going to open the flood gates of repatriation, but it could put a finger in a couple of holes in the dike to stem some of the outward flow of capital.
What has not yet been discussed is revamping a lot of the tax code that creates even more barriers to repatriation. Currently, there are enormous penalties – much greater than even the current 35% corporate tax rate – that make repatriation very detrimental to corporate shareholders. Even with a lower corporate tax rate, it doesn’t always make sense to repatriate. Corporations have to consider whether it is worth paying the penalties for the long term lower tax rate, or whether those rates could change in two to four years and they paid the penalties only to be punished for it later.
Considering things rationally rather than emotionally, lowering these barriers, or even eliminating them, encourages incredible amounts of new investment capital flowing back into the US. While it is very unlikely all the money will find its way home – without a corporate tax rate of 0% – imagine the impact of $3 trillion of new money coming into the economy. To place it into perspective, there is approximately $17 trillion in existence in the entire world. That means as much as 18% of all the US dollars in the world could be flowing into the US for new investment, if all of it were to come back home.
While it is true that lowering the barriers or eliminating them might encourage more expatriating – outflow – of profits, it does make repatriating flow much more smoothly and encourages much more repatriation than it does expatriation. Many US citizens have been demonized for years about moving their money to offshore tax havens through corporations, but if we give them a safe means to move it back and keep it in the US, they don’t have to be viewed as evil villains for simply using good common judgment.
What if we thought of things a bit differently? What if we made the US a tax haven for the rest of the world? Not only would we get back our possible $3 trillion in US corporate capital, but there would also be an enormous influx of foreign investment. A tax haven in Switzerland or the Cayman Islands is one thing, but there is no better investment potential than within the US economy. It would be far more attractive than any other tax haven in the world. If you want to see the US become a place of unmeasured wealth for even the poorest of citizens, the way to do it is through eliminating corporate taxes and repatriation penalties.
Tax revenues lost from decreasing or eliminating corporate taxes and barriers to repatriation would be more than offset by a booming economy that dramatically increases revenues from other taxes. Economic activity of all sorts would explode with an influx of cash, possibly more than doubling the economy. While rapid expansion in an economy can be viewed as negative by many economists, this one would be different. The expansion would be here to stay, because the increased economic activity would stay as long as the favorable tax policies remain.
The largest hurdle to repatriation incentives and foreign capital investments in the US is the persistent and ever-present mentality of limited pie. That is to say that a very large portion of the population believes that the economy is a pie of limited size and that whenever someone gets a larger piece, it comes at the expense of everyone else. For so many people there needs to be a change in thinking – Â a shift in paradigm. There is no pie, just a large economy that can grow such that everyone has an ever-growing piece of desert. All that supposed evil greed from corporations could be leveraged to the benefit of everyone.
Danny Chabino
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