Congress Should Stimulate Economy With $500 Billion in Private Investment By Temporarily Reducing U.S Business Taxes on Foreign Earnings

The quest for cash to jumpstart the ailing U.S. economy could be alleviated if congress would revisit the 2004 successful economic stimulus measure that enabled U.S. businesses to invest $360 billion of foreign earnings at a temporary, reduced tax rate of 5.25%.  In a new study commissioned by the American Council for Capital Formation (ACCF), renowned economist Dr. Allen Sinai of Decision Economics, Inc. analyzed the benefits that would occur based on an estimated $545 billion of repatriations, similar to the 2004 American Jobs Creation Act (AJCA). Sinai concludes that the U.S. economy would see a substantial boost in investment in plants and equipment and R&D, leading to higher U.S. GDP and job generation.  He also projects nearly $140 billion in tax revenue over five years for the U.S. Treasury—money it would not otherwise receive.

“Unlike many of the stimulus proposals that bear a high price tag, this is a virtual free lunch that congress, the new administration and taxpayers can easily digest,” said ACCF President and CEO Mark Bloomfield.  “This temporary tax reduction can provide a lift to the U.S. business sector, significantly improve the financial position of nonfinancial corporations, and help relieve the tight credit and liquidity restraint for a number of companies.”

Sinai’s quantitative study (available at www.accf.org) concludes that temporarily reinstating an 85% dividends-received-deduction for repatriated foreign subsidiary earnings would lead to the following economic benefits:

  • Increased U.S. GDP, peaking at an additional $110 billion in 2010
  • Reduction in outstanding debt, which would improve credit availability
  • An average annual increase of $56 billion in new investment over the next 5 years
  • Increased U.S. R&D spending by approximately $7 billion per year over the next five years
  • Job generation within the U.S. economy peaking at 614,000 in 2011
  • Nearly $140 billion in tax revenue over five years from initial cash investment and residual economic activity

ACCF also pointed to a survey of U.S. companies that utilized the 2004 AJCA and found, on average, that 25% of the funds repatriated were used for U.S. capital investment, 23% for hiring and training of U.S. employees, 15% for U.S.-based R&D, and 13% for U.S. debt reduction.  Another survey indicated repatriating companies increased their total investments in the United States by over $230 billion compared to prior years.

“This temporary tax reduction would provide much needed cash flow for capital spending, R&D, strengthening corporate balance sheets, new jobs and produce gains for the overall economy,” said ACCF Senior Vice President and Chief Economist Margo Thorning.  “This is a true win-win alternative to placing further strains on the federal budget and Federal Reserve.”