Here It Comes: Democrats Considering "Tax Repatriation Holiday" Economic Massacre

Tyler Durden's picture

Here comes the headless horseman cavalry:

  • SCHUMER SAYS SENATE DEMOCRATS WEIGH TAX REPATRIATION HOLIDAY
  • SCHUMER WOULD USE REVENUE FROM HOLIDAY FOR INFRASTRUCTURE JOBS

How the second sound bite makes any sense, we will need to ask someone with a full frontal lobotomy. What revenue? Where it is coming from? Doesn't Schumer have some Chinese currency manipulation bill he has to be submitting to Senate for the nth time instead of boosting multinational EPS through buybacks, while killing even more US jobs? Luckily it was just yesterday that we discussed that this whole process will do nothing at all to boost jobs as captured best by
Kristin J. Forbes, an MIT economics professor who was on the Bush team
back when the Homeland Investment Act in 2005 was enacted, who said: "For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages." Another economic disaster in the making, brought to you by the clueless captain of this country.

Full post from yesterday on this very topic:

The Lost Cause That Is Tax Repatriation, Or The Folly Of The Homeland Investment Act Part 2

Just like back in January when rumors of tax repatriation holiday
started creeping up, the past week has seen a surge in speculation that
the Homeland Investment Act part 2 may be coming back. Unfortunately,
neither now, nor in January, nor during the original HIA back in 2005,
did this tax repatriation of billions in cash do absolutely anything to
stimulate the economy, and in fact the waves of layoffs that followed
likely added to the weakness that would become apparent with the
December 2007 transition into the Second Great Depression. Yet that will
not stop big multinational companies from lobbying for this one time
gift which will allows management teams to buy back shares, and lock in
individual profits on their insider holdings (certainly expect an unseen
wave of insider selling in the aftermath of a HIA 2 should one be
implemented). As for the economic rationale, there is none. We discussed
this back in January and February extensively, but for hose who may
have forgotten, here is a good recap courtesy of David Rosenberg's
latest leter to clients.

Tax Breaks for Companies

At
a time when nearly half of the ranks of the unemployed have been
looking for work fruitlessly for at least six months, and a time when
they are about to lose their long-term jobless benefits, it is amazing
to see so many folks out there calling for the White House to stimulate
the economy by allowing businesses a form of tax holiday to bring home
their locked-up profits from abroad. This is being touted as a low-cost
scheme to get the economy moving (the NYT had a good article on this
proposed strategy yesterday).

First off, the major contributors
to employment are small businesses, and they don't have locked up
earnings abroad — they are paying their 35% top marginal rate rather
than avoiding it. Second, the Bush team tried this gimmick in 2005 with
absolutely no impact on capital spending or employment growth, though it
sure did help out on the stock buyback programs and divided payouts. So
would it be good for the stock market? Very likely. But a lot of this
locked-up cash sitting abroad is centered in the pharma industry and as
such it was nifty to see how the NYT tracked what Merck did with the
$15.9 billion it brought home back in 2005 — "according to regulatory
filings, though, the company cut its work force and capital spending in
this country in the three years that followed."

Here is what
Kristin J. Forbes, an MIT economics professor who was on the Bush team
back then (and led a study by the NBER showing there to be little impact
outside of helping reduce the deficit temporarily) said on the matter:

"For
every dollar that was brought back, there were zero cents used for
additional capital expenditures, research and development, or hiring and
employees wages.
"

Quite an admission of failure. It
does stand to reason as to why such a policy today would have any impact
since this is not exactly a business sector that is starving for
liquithty as it is.

And below we repost some of the salient points from Citi's Steven Englander who essentially said the same thing 6 months ago:

HIA-2 under discussion

  • HIA
    is attractive as a way of reducing effective corporate taxes
    temporarily and improving the tone of the US corporate sector, but the
    direct impact on investment and employment appears limited
  • The total flows are likely to be much higher than in 2005
  • The non-USD share is less certain but may be somewhat lower
  • Central banks may see this as a golden opportunity to diversify

A
renewed program to allow repatriation of foreign profits at favourable
tax rates is again under discussion in the context of broader corporate
tax reform. Proponents argue that it provides inexpensive stimulus to
the US economy at a limited budget cost. Opponents argue that it
provides few practical benefits; rather it creates incentives to keep
earnings abroad in anticipation of subsequent rounds of HIA (Homeland
Investment Act – the actual name of the bill was the American Jobs
Creation Act of 2004, but we will use HIA-1 to refer to the 2004 bill
and HIA-2 to refer to any prospective 2011 measure).

And the pros and cons:

The disadvantages:

  1. In
    2005, HIA-1 delivered much less in direct employment and investment
    than promised. For example, see “Tax Incentives and Domestic Investment:
    An Empirical Analysis of the Repatriation Decisions of U.S.
    Multinational Corporations Following the Implementation of the Homeland
    Investment Act of 2004” Michaele L. Morrow, Ph.D,. Dissertation, Texas
    tech University, May 2008, or “Watch What I Do, Not What I Say: The
    Unintended Consequences of the Homeland Investment Act “ J Dhammika
    Dharmapala, C. Fritz Foley and Kristin J. Forbes, Journal of Finance,
    forthcoming (2011).
  2. Under HIA-1, the incentives to increase
    employment and investment were limited. The major impact of HIA-1 was to
    allow foreign earnings to be repatriated at low tax rates, with few
    binding additional requirements. From firm’s point of view, HIA-1 was
    equivalent to a lump-sum tax benefit which would generate additional
    investment and employment primarily in cases in which firms had
    restricted access to credit markets. Firms with large amounts of profits
    abroad probably could borrow domestically for hiring or capital
    expansion so would not have been constrained in their prior investment
    decisions.
  3. Crafting a bill that increases direct marginal
    incentives for employment and investment is difficult. If the
    requirements are too stringent, firms will simply pass on repatriation.
    If firms are already unconstrained with respect to hiring and
    investment, a marginal increase may bring forward investment plans into
    2011, with some payback in subsequent years. If the terms are relatively
    lax, as in HIA-1, the impact on direct employment and investment will
    be small.
  4. The firms that have the money abroad (tech, pharma)
    are not the sectors that need the most balance sheet help (households,
    real estate, state and local government) nor does it help firms whose
    operations are primarily domestic.
  5. Repeating HIA produces
    incentives for firms to keep funds abroad. There is the risk that firms
    will see HIA as a once or twice a decade low-tax repatriation
    opportunity. The extent of these incentives depends on the gap between
    US domestic and foreign tax rates. The combined effect of HIA plus a
    reduction in US corporate rates would largely mitigate these incentives.
    Surprisingly, BEA data suggests that until the possibility for HIA-2
    emerged again in early 2009, the aggregate dividend repatriation rate
    was not much lower than it had been prior to HIA-1(Figure 1), and the
    low repatriation since 2009 could also reflect limited US investment
    possibilities.

The advantages:

  1. HIA-2
    presents an opportunity for the Obama Administration to demonstrate its
    commitment toward a more business friendly approach to an important
    constituency.
  2. HIA-2 eases access to funds that are viewed as
    locked abroad to some degree. A corporate tax system that encourages
    firms to keep cash abroad while borrowing domestically is arguably less
    than optimal.
  3. The sums involved are substantial. There are
    estimates of up to USD 1 trn kept abroad - roughly half the cash
    currently held by US corporates. Data from the BEA shows USD1.2 trn of
    un-repatriated earnings since 2006, significantly more than had been
    accumulated over the 1990-2004 period (Figure 2).
  4. The tax
    costing can be relatively benign because the low tax rate is largely
    offset by the increase in flows. The repatriation flows in response to
    the lower corporate tax rate are so high that they largely pay for
    themselves (in subsequent years, costing depends on how much flows are
    expected to be reduced by anticipation of future HIA)
  5. In
    contrast to 2005, improving balance sheets and financial statements is
    higher on the list of policy priorities. One of the Fed’s stated
    objectives in QE2 was improving the attractiveness of other asset
    markets relative to the bond market, so in 2011, balance sheet
    improvement can be viewed as a macroeconomic policy goal.
  6. 2005
    was one of the best years of the decade in terms of asset markets and
    growth so indirect effects may have been large. It is hard to pin down
    these indirect effects (and obviously there were broader macroeconomic
    forces at play) but 2005 was a year of strong employment and investment
    growth (Figure 3), a strong USD, and sharply revised expectations of how
    quickly the Fed could normalize rates. From the time the bill was
    passed in late 2004 till the end of 2005, expectations of Dec 2005 short
    rates rose from just over 3% to 4.5% (Figure 4).
  7. No one’s ox is
    gored, at least not directly. It is difficult to craft a stimulus
    package that is relatively cheap in budget terms and which provides
    broad stimulus and that does not carry a well-defined set of losers.
    Especially if combined with broader corporate tax reform that narrows
    the gap between US and foreign corporate tax rates, HIA-2 may be viewed
    as more attractive and practical than other more theoretically
    attractive stimulus measures.

Lastly, for all those who believe that HIA 2 will be an unequivocal benefit for the S&P, this piece by Goldman Sachs from January
reminds that the biggest impact from all that fund flow will likely
serve as a major catalyst for USD strength. Recall that nothing in the
current centrally planned market is more important than the weakness of
the USD. If indeed, the HIA 2 is contemplated as a short-term boost to
the S&P, will it backfire even with that modest purpose of making
the mega rich even richer? Goldman seems to think so.