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

Tyler Durden's picture

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.

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Cdad's picture

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).

EXACTLY!  Thus giving equally poor treatment to employees and shareholders, alike.  This insider selling matched with corporate buyback announcement is yet another kleptocratic scam.

"Operation Shareholder Bagholder"

mkkby's picture

The real travesty here is how large corporations get more and more advantages over small and medium-sized businesses.  There will never be significant hiring in USSA again until that playing field is leveled.

I can guarantee where the money will go.  Mostly to management as bonuses for their "great" work in bribing officials.  A penny or two on the dollar for those cheap whore officials.

Pladizow's picture

If I legally had even $1.00 outside of the country and reach of the US Gov, I would never bring it back.

Let alone trillions.

US Gov: Sure bring it back we will never tax it or treat you unfairly - trust us!

WestVillageIdiot's picture

+535 bought and paid for thieves (maybe 534)

hambone's picture

Doesn't matter what it does - only how it's perceived!!! 

Bullish so this allows talking heads to rant on another topic why DOW will see the promised land of 20k.

The fact it's another sucking wound to Amerika is off topic.

etrader's picture

Is it the usual 3.15pm  compression spread close time on the ES ;-)

TradingJoe's picture

All Irrelevant! The US (and Global) Financial System Implosion will wipe out EVERYTHING

and EVERYONE! Only "Who he holds" physical PMs will eventually survive! Expect unimaginable suffering, total destruction, of the world as we know it! Retreat, Prepare, Insulate,  Wait IT Out! This is no silly doom and gloom! Look at what's at hand! All over toilet paper of all colors and sizes but with the same value ZERO!

Cdad's picture're suggesting that buying the tops in the REITs is a bad idea?

TradingJoe's picture


I am no "all knowing Eye", for sure "we who we know" can still make a boat load on the way down, up again and down again, what I am trying to say is, the inevitable WILL happen and there is no point in playing these bastards' hand! You can buy any investment you want, in the end all that matter will be HARD ASSETS! Nothing Else!

topcallingtroll's picture

We dont need temporary tax repatriation.

We need to permanently lower corporate tax rates so we no longer have some of the highest rates in the world.

Robslob's picture


Corporations don't pay tax now...the "rate" is immaterial when you don't pay.

topcallingtroll's picture

You think just because a company originated over here and trades on a usa stock exchange that it is somehow an "american" company. Most of these companies are structured so that they may be majority foreign domiciled, the important parts at least. Equalizing tax rates would reduce the incentive for these companies to create complex structures and move important operations overseas.

alien-IQ's picture

but the cost of labor is still cheaper overseas. So what do you suggest we do to accommodate corporate needs for bigger and bigger profits? Should we lower the wages here to compete with India? How nice huh? I can just see the joy in the faces of American manufacturing workers earning .45 per hour and paying 35% tax on that. That's gonna make for a wildly happy home come dinner time.

"Honey, I'm home...what's for dinner?"

"I baked the dog!"

topcallingtroll's picture

Labor is cheaper overseas, but we dont need to further incentivise corporate emigration by making capital costs and tax burdens look more enticing overseas also.

alien-IQ's picture

You are just playing right into the corporate shell game. You can't please them and you cannot appeal to their sense of "patriotism" or "nationalism".

If you lower the tax rate, they'll complain about the wages. If you lower the wages, they'll complain about the benefits. If you eliminate the benefits, they'll complain about people not working weekends or holidays.

It never ends. What needs to be done to to cease protecting them. If you want to open your factory in India or Mexico or Brazil or Pakistan...FINE. Do it...but if you wake up one day and learn that the government has changed their mind and have decided to nationalize your company...DO NOT come crying to America to get you your company back.

The problem is that they enjoy all the protections and political benefits of being an American company, without paying the toll for that access. I call bullshit on that. If you want the protection, pay the fuckin vig baby.

topcallingtroll's picture

It appears that the vig is too high for most of these corporations. They seem willing to take their chances!

Urban Redneck's picture

It's not the cost of labor that is prohibitive to establishing manufacturing in the US, especially with high transportation costs, it the regulatory and litigation burden and overhead that makes the US uncompetitive. 

wisefool's picture

You mean Al Gore was is truly for the working man in america and was exploring the spiritual aspects of Bhuddism?

Why the left/progressives support these Democrat Poli's is dumber (in my mind) than the people supporing the "republican right" because they think some day they will be rich too.

WestVillageIdiot's picture

Have you ever spoken to the religious lefties?  They can laugh at the moron righties all they want but they are worse.  I can point out a whole $hitload of examples just from my own personal experience.  They make the flag waving, god spewing rednecks look downright brilliant.

alien-IQ's picture

Corporate tax rates are just like SEC rules...they ONLY apply to the little guy. To think otherwise is naive.

The comment: "We need to permanently lower corporate tax rates so we no longer have some of the highest rates in the world." is pure regurgitation of CNBC bullshit.

The biggest corporations in the world pay little to no taxes.

topcallingtroll's picture

Because they are foreign domiciled in part and pay the lower foreign rates instead.

These big corporations are really no longer usa companies as they are currently structured.

alien-IQ's picture

Sell crazy somewhere else, I'm all stocked up.

faustian bargain's picture

?? you think he's wrong? Which "American" corporations do you know of that pay no taxes? The biggest corps today are multinational. If the US wants to 'win' the tax arbitrage game, the US needs to compete. Same with every other kind of arbitrage - labor, real estate, regulations, currency value and stability, etc.

We've effectively exported jobs and inflation with our monetary and fiscal policies, it only stands to reason taxes would get exported too.

alien-IQ's picture

"Over 100 companies on the S&P500 paid less than 20 percent in taxes, according to a study by Capital IQ and the NYT. That's not even counting 37 companies like Citigroup and AIG that received more in tax credits than they paid. All this thanks to loopholes in the immensely complicated tax code."

#16 Red Hat, Inc. (RHT)
Pre-tax income: $463 million

Taxes paid: $21 million

Tax rate: 4.62%

#15 Boeing Co. (BA)

Pre-tax income: $17,587 million

Taxes paid: $796 million

Tax rate: 4.46%

#14 (AMZN)

Pre-tax income: $3,512 million

Taxes paid: $152 million

Tax rate: 4.33%

#13 Broadcom Corp. (BRCM)

Pre-tax income: $1,228 million

Taxes paid: $41 million

Tax rate: 3.32%

#12 Host Hotels & Resorts Inc. (HST)

Pre-tax income: $1,116 million

Taxes paid: $34 million

Tax rate: 3.05%

#11 NRG Energy, Inc. (NRG)

Pre-tax income: $5,343 million

Taxes paid: $154 million

Tax rate: 2.88%

#10 TECO Energy, Inc. (TE)

Pre-tax income: $1,620 million

Taxes paid: $37 million

Tax rate: 2.31%

#9 Allegheny Energy Inc. (AYE)

Pre-tax income: $2,538 million

Taxes paid: $58 million

Tax rate: 2.28%

#8 NVIDIA Corporation (NVDA)

Pre-tax income: $1,817 million

Taxes paid: $41 million

Tax rate: 2.24%

#7 Xcel Energy (XEL)

Pre-tax income: $4,334 million

Taxes paid: $77 million

Tax rate: 1.78%

#6 NextEra Energy, Inc. (XEL)

Pre-tax income: $8,572 million

Taxes paid: $149 million

Tax rate: 1.74%

#5 Plum Creek Timber Co. Inc. (PCL

Pre-tax income: $1,355 million

Taxes paid: $22 million

Tax rate: 1.62%

#4 Western Digital Corp. (WDC)

Pre-tax income: $2,507 million

Taxes paid: $40 million

Tax rate: 1.6%

#3 HCP, Inc. (HCP)

Pre-tax income: $614 million

Taxes paid: $9 million

Tax rate: 1.42%

#2 Carnival Corporation (CCL

Pre-tax income: $11,250 million

Taxes paid: $126 million

Tax rate: 1.12%

#1 Range Resource Corporation (RRC

Pre-tax income: $1,228 million

Taxes paid: $7 million

Tax rate: 0.53%

Read more:

topcallingtroll's picture

I wonder how many of them use the irish plan and are structured with an ireland pass thru or subsidiary of an irish corporation?

If i really understood the complex multinational structures i would not be sitting here seeing government funded patients today. I would be a multimillionaire on a yacht with my.crew of hot ukranian bimbos and nurses.

alien-IQ's picture

I know not what voodoo they do...I only know this: they pay less taxes (on a percentage basis) than a kid working at MacDonalds...yet they feel they pay too much.

In the olden times...that was called "Just plain fucking greedy".

faustian bargain's picture

I'm against taxes, especially when they're used for unconstitutional things. I'm all for default and reset, with extremely limited federal government going forward.

We wouldn't have to worry about tax repatriation if government spending weren't so profligate in the first place. Half of that profligacy is domestic 'welfare' programs, the other half is foreign empire building and warmongering. The federal government can go take a flying leap, as far as I'm concerned.

faustian bargain's picture

That said, I'm also against corporate 'welfare'.

I just don't think the way out is to tax more; it's to spend less. And neither way is going to prove sustainable enough to actually get us 'out', in my opinion. Hence I believe some kind of default/reset event is almost inevitable.

wisefool's picture

That is the double-fuck-you of this situation. I am ok with the "don't concern yourself, with the rich mans gold (or how he spends it)"

But corporations don't pay taxes, they dont have a conscious to be offended about how the taxes are spent.

Workers pay taxes, they do have a conscious, and their tax money is what is used for things they might morally disagree with.


yakmerchant's picture

Then please do explain why the little corporations do pay higher rates than the GE's of the world (outside of the fact that Immelt is constantly blowing Obama).   And please explain how double taxation serves as anything other than a way for our government to pick winners and losers?

topcallingtroll's picture

The little corporations pay higher rates because it is not cost effective to hire an army of accountants and tax experts and create complex international corporate structures.

johnnynaps's picture

It's called Lobbying! Some rich, smooth talking prick sucks off a Senator or 2 and throws them a monetary bone. Not to mention, Big business runs this shitty country anymore. I'm still not sure why we even have elections. But, after hearing the Congressman from Georgia talk about how he is worried Guam will capsize if we put a base there, one thing is certain. There should be a competency exam for all elected officials as opposed to the $10k they must put up to run!

wisefool's picture

We can lower rates if we eliminate 90% of loopholes and deductions. We need to employ all tax professionals on the transition plan and stop training new ones. Do not even present it as an option in university curriculums.

If TPTB want analytical kids to take STEM (Science, Technology, Engineering, Math) curriculums in college, do not set up a system where tax accounts/lawyers make more money on the first day of work at G.E. than an engineer does. With the relative risk being that if the tax jockey screws up, they get fired. if the engineer screws up people could die.

MSNBC's Lawrence O'Donnell (the only grown up on that network) threw his relative support behind Ron Paul in the Republican nomination, based on Dr. Paul's position on gay marriage (government should honor any contract between individuals) But dont descriminate based on the oldest tax loophole of all time, first well intended step on the road to central planning hell.

Let religion/culture/family promote/subsidize choices as they see fit. Let media and technology shape the market for currently subsidized goods. This is not 1925 where a farmer in nebraska has no way to understand that research must be performed in large scale water treatment for urban areas. And vica versa.


topcallingtroll's picture

We definitely have a screwed up system which virtually forces capital misallocation.

RockyRacoon's picture

I just fired off a copy/paste of this article to Kudlow.  He's all for this repatriation.

Fat lotta good it'll do.

Here is his email:

Robslob's picture

This is EXACTLY why those Tax Repatriations will be passed:

1) More layoffs

2) Not stimulate the economy

3) Buy back shares, lock in insiders profits

4) end up in pockets of insider sales

Sweet...just not for America.


The Axe's picture

Market acts like pigmen know something that is not public yet...very strong the momo men are

Everybodys All American's picture

Tax Repatriations should be targeted to real estate. Not reits but the stressed real estate markets. If you buy a distressed or foreclosed property then you can bring the money back in tax free. This would help to put a floor in the real estate market. Otherwise I really don't see it solving any particular problem.

topcallingtroll's picture


Lets keep adding more rules to the tax code.

WestVillageIdiot's picture

So as long as it keeps the ridiculous housing bubble propped up it is okay?  I think you win for the day's stupidest idea and in this day and age that is pretty hard to do. 

Dr. Engali's picture

The only thing that will fix housing is to let the market forces work. It will eventually find it's equilibrium. All these patches do is prolong the agony. The sooner they pull off the band aid the better off we will be.

Sambo's picture

Small businesses & entrepreneurs need to be encouraged, else no recovery.

Read "Small is beautiful" by Schumacher.

WestVillageIdiot's picture

Can you lend that to my wife?  I keep trying to tell her.

How much clearer can it be that corporations, by their very nature, are sociopathic destructive entities?  No wonder our sociopaths in charge love them so much.  It is a match made in Hades that works great for all of the devils.


disabledvet's picture

the rumors are of "much larger discussions" in that arena.  just "speculation" of course. 

youngman's picture

I do not think they will bring it back..why...the future is outside the USA...they need the cash to buy their new HQ´s when they leave the USA...why invest here..for the higher rules..stupid students..

topcallingtroll's picture

That is correct.

Considering how the united states micromanages and abuses private capital a corporation would be stupid to repatriate cash to the usa for long term capital projects.

Without major long term tax reform and SENSIBLE health care reform corporations will use any tax holidays for self enrichment of management and stock buybacks.

narnia's picture

Taking more money out of the private sector & giving it to the public sector certainly won't help us, either.  What will $300 billion get us, less deficit spending on a land war in Libya & God knows where next?  

I say 100% tax free provided it (1) funds a pension system or (2) corresponds to an ESOP stock purchase.  

topcallingtroll's picture


Lets add more rules and regulations to the tax code.

Even supposed Hayek loving zero hedgers are guilty of the fatal conceit.

"Big complex government can work. Just let me give it a try."