Major Economic Stimulus by Reducing Taxes on Repatriated Foreign Earnings

Macroeconomic Effects of Reducing the Effective Tax Rate on Repatriated Foreign Subsidiary Earnings in a Credit- and Liquidity-Constrained Environment


Decision Economics, Inc. | New York · London · Boston


The U.S. economy is in recession, probably the longest and deepest since the recessions of 1973-75 and 1981-82, with a chance of something worse.  A global recession also is reality, the worst since the early 1980s. With a financial crisis—huge declines in asset prices, sharp contractions in the balance sheets and numbers of bank and financial intermediaries, and imploding credit—a considerable chance of an even more serious and potentially severe economic downturn is indicated.  A credit crunch, within and outside the financial system overlays the economic downturn and intensifies it.  The recession itself feeds increased credit risk and the contraction of credit, and a credit- and liquidity-constrained environment intensifies the credit crunch and the economic downturn. This loop is not easy to break!  Any public policy that can ease the financial crunch on business should be considered.

Tax Reductions on the Repatriated Foreign Earnings of U.S. Subsidiaries: This new analysis examines the macroeconomic effects of a temporary, one-year reduction in the U.S. corporate tax rate on repatriated earnings, similar to that used in the American Jobs Creation Act (AJCA) of 2004.  The AJCA provided for a temporary 85% dividends-received-deduction on repatriated funds that qualify, or an effective tax rate on foreign subsidiary earnings (FSE) of 5.25% instead of the corporate income tax rate of 35% when companies repatriates corporate profits earned and residing abroad. Evidence on the AJCA’s effects have generally been positive with for its impact on the economy and on corporations who repatriated funds.


The study examines the macroeconomic effects of once again establishing a temporary 85 percent dividends-received-deduction for qualifying corporations starting in, or retroactive to, January 2009, by simulating the policy with a large-scale structural macroeconometric model, the Sinai-Boston (SB) Model. The SB Model is a full-blown model of the U.S. economy and financial system and captures, more than others, both the real and financial effects of measures like the AJCA, including business capital spending, jobs creation, corporate sources and uses of funds, credit, borrowing, balance sheet effects, and the financial position of nonfinancial corporations.


Temporarily reinstating the dividends-received-deduction for repatriated foreign subsidiary earnings leads to significantly higher corporate cash flow, increased capital expenditures including R&D, improved business financial conditions, more jobs at nonfinancial corporations and at financial institutions, and a significant increase in real economic activity.

Any increase of inflation is negligible, 0.1 percentage points, but there is a sizeable decline in the unemployment rate, although with lags, of 0.5 percentage points.

Two major problems of the current situation are addressed: some relief to business in a credit- and liquidity-constrained environment that is holding back business spending and contributing to a rise of unemployment.  The improvement in business financial conditions sets the stage for more hiring later on by enhancing the liquidity and financial position of nonfinancial corporations.  Thus, both current problems of tight credit and jobs are helped by the program.

In addition, the study indicates that from this program the U.S. Treasury would receive funds it would not otherwise get, approximately 5-1/4% of the dividends from foreign subsidiaries that are received, repatriated funds which qualify, and that additional tax receipts would be generated from the resulting increases in economic activity including personal, corporate, capital gains, social security, and excise taxes.


All-in-all, a reduction in the effective federal tax rate on repatriated earnings of foreign subsidiaries provides a lift to the U.S. business sector and financial condition of nonfinancial corporations through the balance sheet effects of new cash flow in a credit- and liquidity-restrained environment; thus to the overall economy.

Increased liquidity, less need for credit, and much greater cash flow to nonfinancial corporations stimulate spending on capital formation, R&D, and hiring that raises the growth and levels of real economic activity in a credit- and liquidity-restrained recession.

The one-time incentive for repatriation appears to be largely “win-win” for the economy and with regard to its costs, showing very little upward effect on inflation, with lags reducing the unemployment rate and creating new jobs, increasing capital spending and R&D, and inducing increased tax receipts and a lower budget deficit for the federal government as a result of taxing previously untaxed earnings even though at a lower rate and additional tax receipts from an improved economy.

Download Full Study