After the great repatriation . . . ?


Where will the money go and what will it do?

By Robert U. Ayres and Michael Olenick

For several weeks, the guys and gals at CNBC and Bloomberg News, and their guests, have been talking about the coming tax reform (cut) legislation that the Republicans finally seem to have in their grasp. Well, maybe not exactly reform, maybe not revenue-neutral, but at least tax cuts for the corporations that give them campaign money. All the cheerleaders, both in Congress and the White House, assert confidently that faster growth will pay for the cost of the tax cut, even though virtually all top economists, starting with Paul Krugman and Larry Summers,  say that it won’t.

And what they all agree on is that there is around $2.5 trillion in untaxed profits sitting out there in overseas banks, mostly in tax havens,  just to avoid paying US taxes.  Apple, alone, allegedly has $260 billion to bring home, if only Uncle Sam would kindly cut his cut. (Meanwhile Apple is selling long-term bonds, carrying 2.4% interest, for purposes of “returning capital to shareholders” i.e. share buybacks.) The plan being discussed by the 112th (current) Congress would reduce the corporate tax rate on foreign corporate profits repatriated as dividends to 20%.

This legislation is a larger version of the “tax holiday” that was tried in 2005 as part of The American Jobs Creation Act (PL 108-357) during Geo Bush’s administration. The corporate promoters and their lobbyists said that 500,000 new jobs in the US would be created in 2 years. Here’s what some of the politicians at the time said about the bill, as recorded in the  Congressional   Record in 2004:

  • Grassley: “This bill contains some of the most important international tax reforms in decades, bringing foreign earnings home for investment in the united states, instead of investing overseas, hence creating jobs in the United States” (S11038)
  • Graham: “The rationale for this proposal is that reducing the tax rate will encourage U.S. multinational companies to expatriate income held offshore in order to make investments in the United States that will create jobs” (H4875)
  • Udall:”I will vote for it because it include provisions to encourage American Corporations doing business abroad to repatriate their overseas earnings for investment here at home.”(H8724)
  • Eshoo: “I also strongly support the inclusion of incentives for corporations to repatriate their overseas profits which would stimulate the investment of hundreds of millions of dollars in our domestic economy” (H4408)
  • Phil English:”…The billions of dollars that will be brought back will be used by American employers to hire new workers, invest in top-of-the-line equipment, and build new plants right here at home, instead of in counties where their earnings are currently stranded.”(H8704)

Here is what actually happened in 2005[1]. The tax rate for funds repatriated under the Act was set at 5.25% (a one-time 85% discount on the 35% top US corporate Income tax rate. During the next year $299 billion was repatriated by 843 companies (out of 9700 companies that were eligible). That compares to around $60 billion p.a, (on average) of repatriations of foreign earnings over the previous 5 years. Almost all of the repatriations were done by companies in the “tech” sector: $99 billion was repatriated by pharmaceutical and medicine producers (32% of the total), $58 billion was repatriated by computers and electronic equipment firms (18%). Their aggregated tax savings were estimated at $3.3 billion.

How many new jobs were created? The answer is, none. Instead, the top 15 repatriating companies  reduced their US employment by 20,931 jobs (about 35%) between 2004 and 2007. (A few companies reported increases in employment, due to acquisitions. There was no increase in R&D by the top 15 repatriating firms; R&D decreased slightly (even though six of the top eight were pharmaceutical companies that are notoriously dependent on R&D). Two academic studies concluded that repatriation in 2005 had no effect on R&D expenditure (Blouin and Krull 2009, Dharmapala, Foley, and Forbes 2011)

Use of repatriated funds for share  buybacks was explicitly prohibited by the Jobs Creation Act of 2004. But, strangely, share repurchases by the 19 repatriators that were  surveyed (including the top 15) increased from $2.2 billion (average) in 2003 to $2.5 billion (average) in 2005 and to $5.3 billion (average) in 2007. Share buybacks and executive compensation were the only expenditure category that increased as a result of the repatriations. One study found that for every $1 increase in repatriated funds, between $0.60 and $0.92 went into buybacks (Dharmapala, Foley, and Forbes 2011). It seems that corporations could – and did– legally use the repatriated funds in the “allowed” areas while taking previously budgeted corporate funds away from those areas (i.e. R&D) to use for the buybacks (Levin et al. 2011) p.23, footnote 61. Admittedly, buybacks by company were quite variable from year to year between 2002 and  2007 as can be seen in (Levin et al. 2011) Appendix, Table2.

Executive compensation was the other expenditure category that increased dramatically in most of the surveyed corporations. Only one, Motorola, reduced executive pay between 2004 and 2007. Collective executive compensation for 19 companies (including the top 15) increased by 35% in one year (from 2005 to 2006), along with year to year increases in the prior years of 14% or 15% p.a. whereas worker compensation increased by only 5%. Executive pay decreased slightly from 2006-to 2007, primarily due to an enormous one-time decrease at Hewlett-Packard, due to a management change.

Here is a list of the top 19 corporate repatriators, the amounts repatriated ($billions), the 6 –year buyback total ($ billions), increased executive compensation from 2004 to 2007 ($millions) and  changes in employment in the US. The employment changes are as reported by the companies and a few of them are doubtful, because mergers and acquisitions were changing the numbers sonstantly.

Pfizer                    36.577 (45.5 BB)  Exec pay up 12.8 m,   12,000 jobs cut .

Merck                  16.687 (8.5 BB)    Exec pay up 20.3 m,   1000 jobs cut

H-P                       16.522 (26.9 BB)  Exec pay up 49.3 m (in 2006),  8722 jobs cut

IBM                      11.918 (50.4 BB)  Exec pay up 7.0 m.     12,830 jobs cut.

J & J.                     11.476 (13.6 BB)  Exec pay up 32.8 m.   4062 jobs cut

Bristol-Myers     9.734 (0.2 BB)      Exec pay up 13.4 m.    581 jobs cut

Schering-Plough 9.617 (0 BB).       Exec pay up 29.6 m.    5400 jobs gain

Eli Lilly                  9.476 (1.17 BB)    Exec pay up 0.7 m.     1827 jobs cut

DuPont                               8.374 (6.4 BB)      Exec pay up 11.7 m.    1500 jobs cut

Altria                    7.953  (10.8 BB)   Exec pay up 52.1 m.    6070 jobs cut

Intel                      7.560 (33.5 BB)    Exec pay up 25.6 m.    2504 jobs cut

Coca Cola            7.557 (10.1 BB)    Exec pay up 14.6m.     3600 jobs gain

PepsiCo Inc.        7.490 (17.3 BB)    Exec pay up 9.5 m.      6000 jobs cut

P&G                      7.028 (32.9 BB)    Exec pay up 20.2 m.    7405 jobs gain

Motorola             3.699 (7.7 BB)     Exec pay down 34.0 m. 2865 jobs cut

Oracle                  3.327 (14.3 BB)   Exec pay up 47.5 m.     7508 jobs gain

Wyeth                  3.156 (2.0 BB)     Exec pay up 34.4 m.     2352 jobs gain

Honeywell           2.561 (7.8 BB)     Exec pay up 5.9 m.       3000 jobs cut

MicroSoft            1.114 (125.1 BB) Exec pay up 20.6 m.   10,859 jobs gain


N.B. The five companies that increased US employment (Schering-Plough, Oracle, P&G, Wyeth and MicroSoft) may have added some jobs by organic growth, but acquisitions would explain some of it. (Schering-Plough was the only one that did no buybacks, and it merged with Merck in 2009). Motorola, the only one to cut executive pay, was in a downward spiral just preceding its withdrawal from the smart-phone market and sale of intellectual property to Google. Since 2005 both Motorola and H-P have split and Altria has spun off Kraft Foods (since merged with Heinz). Wyeth has merged with Pfizer and Schering-Plough has merged with Merck, both in 2009. (The latter was a “reverse merger” where Schering-Plough acquired Merck, and then changed its name back to Merck.)

Having absorbed all this information about what happened after the 2005 tax holiday, it is time to think about the current proposal. Firstly, the 2020 version will probably involve most of the same companies, with Apple and Alphabet being the major newcomers.   Of the $2.5 trillion in profits currently held overseas, the biggest share $260 billion) belongs to Apple. The idea that apple might bring that money back home is certainly intriguing.

OK, let’s think like Apple CEO Tim Cook. Let’s suppose a 20% federal tax rate so the IRS  takes $52 billion and California and the other states take $13 billion leaving $195 billion in cash. What could they do with it? Well, they could pay off Apple’s minuscule debt, but it seems rather pointless. Or they could just buy GE, the largest manufacturing company in the US, warts and all. The total equity value of GE is currently about $74 billion. Even after paying a premium price, Apple would still have more than $100 billion in the bank to play with. They could also buy GM, for another $50 billion (it is worth $44 billion now). That would still leave enough cash to buy Ford, as well.  But would Apple shareholders want to own those old companies?  Probably not.

In fact, the most likely way for Apple and Google, MicroSoft and the others to spend their extra after tax cash is in the stock market, mostly for share buybacks. That way share prices would rise in the short run, as existing shares disappear from the market, resulting in greater profits per remaining share. Based on the 2005 case, it is probable that at least 50% of the repatriated money will go to stock buybacks or for acquisitions of other companies. That would be more than a trillion US dollars, straight into the S&P. Since the 1990s, US corporations have invested increasingly large fractions of their earnings in share buybacks, sometimes even more than they have earned, borrowing money to do so. According to a Reuters article (Brettell, Gaffen, and Rohde 2015) investment in buybacks and dividends by US firms, as a share of net income, increased from negligible levels in the 1980s to 38% in 2000,  63% in 2009, 79% in 2011, 89% in 2013, 105% in 2014 and 110% in 2015. The latter figure means that firms borrowed money in 2015 to buy back their own shares, meanwhile adding to already excessive corporate debt.

The prices of the “tech” stocks, in particular, would rise and their top executives, whose compensation is related (even indirectly) to share prices, would get even richer than they are now. This would have another indirect effect: Income inequality will increase. But income inequality, now at record levels, is already too great. Factory workers, and most wage earners, have seen no increase in standard of living for the past 30 years. All the gains have gone to the top 20%, and most of that to the top 1%. This income discrepancy will get greater. Of course (as Republicans point out) most of the equity shares are owned by mutual funds and pension plans, so pensioners with private plans would (briefly) feel richer and spending for tourism and second homes would also rise somewhat. But all of this extra “wealth-related” consumption would be limited to a small segment of the population, roughly the richest 20%. It won’t be enough to drive faster growth.

The Republicans have formulated a budget plan that postulates a 2.9 %p.a. growth rate for the next ten years, based largely on the supposed stimulus of tax cuts and “supply side” ideology. The diagram below (from the St. Louis Federal Reserve Bank) tells an interesting story. Did GDP growth accelerate after the 2005 Bush tax holiday and other tax cuts? It did not; in fact, it tanked.  GDP growth reached a post-war peak (4.8 % p.a.) in 1967 during the Viet Nam War. That peak was driven by a budget deficit — spending borrowed money (it was the time of “guns and butter”) — and it kicked off a persistent inflation. Real growth stayed around 4.5 percent until 1973, the first “oil shock”, and then remained at a lower level.

Growth hovered around 3.1% p.a. through the rest of the 1970s until the second “oil shock” in 1979-80 due to the Iranian revolution. That was followed by Paul Volker’s “inflation killer” interest rate spike in the spring of 1983. That action by the Fed caused a deep but short recession in the US and an economic crisis in Latin America. Productivity, overall, fell from 1967 to 1983. But there was a rapid recovery after that. It was mostly due to a combination of falling oil prices, falling interest rates and rising debt starting in 1985-86. That recovery has been cynically mis-attributed by Republicans to Reagan’s  tax cuts, actually supported by both parties, without mentioning the sharp increase in national debt.

After the 1982-84 recession economic growth still hovered around the 3 percent level for the next 20 years, while productivity increased  from a low in 1987 to a temporary peak in 1993 (after the Gulf War) followed by another low in 1995-96. Thereafter, productivity almost doubled in the decade ending in 2005. Since then both GDP growth and productivity growth have declined in every year up to, and through, 2015. The oil price decline starting in 2014 should have helped, but the data don’t show that.

               GDP continued to grow at 3% p.a. continuously during and through the “Dot.Com” bubble. Despite two highly publicized corporate failures (Enron, WorldCom), there was no slowdown in the non-financial part of the economy. Yet Allen Greenspan’s  Fed responded to the stock market crash in 2001-02 with a series of rate cuts, supposedly to stimulate growth, unnecessarily. The Republican Congress was still addicted to the “supply-side” theory of growth, even though it had already failed once (Stockman 2013). What the Fed’s interest rate cuts in 2003-06 actually induced was a huge real-estate bubble.

It was driven by a toxic mix of rising home prices, unscrupulous mortgage companies, adjustable rate “sub-prime”  mortgages (ARMs)  and the creation of “securitized” bundles of mortgage-based bonds created by big banks, known as “collateralized debt obligations” (CDOs). Those were “snapped up” by insurance companies, pension funds and European banks, because they offered higher returns than government bonds. During those years, some home owners cashed in their equity gains and spent the money. This “wealth effect” added to stock market gains.

But when home prices stopped rising, in 2007, the bubble burst. The resulting failure of Bear Stearns, followed by Lehman Brothers triggered another stock market crash in the fall of 2008. And as the stock market fell, so did home prices. The “wealth effect” that had contributed to GDP growth in 2004-7 went into reverse. Borrowing stopped, people cut their credit card debt, savings increased. This reduced demand (expenditures) in the economic system and reduced GDP gains. [2]

Back to the topic of this article, The American Jobs Creation Act of 2004, was supposed to bring back a lot of capital sitting in banks overseas to escape US Corporate Income taxes and induce another Reaganesque growth spurt. The graph shows that it didn’t work. A down-turn in GDP growth and productivity started simultaneously in 2005, four years after the “” bubble but before the peak of the “sub-prime” bubble. The decline in GDP growth accelerated in 2006 and 2008. It hit bottom in 2009 and has remained low ever since.

Based on history, the faith of the business community in corporate tax cuts and financial deregulation as the key to increasing economic growth is more ideology than science. It is badly misplaced. Historical evidence, as well as rational expectations, tell us that the corporate repatriators of today will not use their money to invest in more factories to make tangible things, not even in China or Viet Nam. The companies with the largest profits sitting overseas did not make those profits by making and selling tangible things (except, perhaps, drugs and computer chips). Apple doesn’t make phones or computers, their suppliers (like Foxconn) do that. They are either drug companies depending on patented products or software companies with monopoly profits. Letting them invest more money in the already over-heated stock market can only have one outcome. There will be another great crash, worse than the last.

Robert Ayres and Michael Olenick

# # #

Blouin, Jennifer, and Linda Krull. 2009. “Bringing it home: A study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the Jobs Creation Act of 2004.”  Journal of Accounting Research 47:1027, Tables 2,3.

Brettell, Karen, David Gaffen, and David Rohde. 2015. The Cannibalized Company: Corporate America’s Buyback Binge feeds investors, starves innovation. 16.

Dharmapala, Dhammika, C. Fritz Foley, and Kristin J. Forbes. 2011. “Watch what I do, Not what I say: The Unintended Consequences of the Homeland Investment Act.”  Journal of Finance 66:753-756.

Greenspan, Allen. 2005. The Economic Outlook. edited by US Congress Jopint Ecoomic Committee. Washington DC: Congressional Record.

Keen, Steve. 2007. “Booming on Borrowed Money.” Debtwatch: http://www.debt

Keen, Steve. 2017. Can We Avoid Another Financial Crisis? : Polity.

Levin, Carl (Chairman), Elise J. Staff Director and Chief Counsel Bean, Robert L. Counsel and Chief Investigator Roach, and Tom Coburn, Ranking minority member. 2011. Repatriating Offshore Funds: 2004 Tax Windfall for select multinationals, majority staff report. Washington D.c. : United States Senate.

Lewis, Michael. 2010. The big short. NY: W.W. Norton, Penguin.

Marples, Donald J., and Jane G. Gravelle. 2011. Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis. Washington D.C.: Congressional Research Service.

Minsky, Hyman. 1986. Stabilizing an unstable economy. New York: McGraw-Hill,.

Minsky, Hyman. 1982. Can “it” happen again? Essays on instability and finance. Armonk NY: M. E. Sharpe.

Stockman, David. 2013. The great deformation: The corruption of capitalism in America New York: Public Affairs.


[1] Our main source is the 78 page Majority Staff Report of the Permanent Subcommittee on Investigations, United States Senate (Levin et al. 2011). We also refer to the report of the Congressional Research Service (CRS) (Marples and Gravelle 2011)

[2] Almost nobody saw it coming. Michael Lewis has chronicled a few long-sighted investment managers who did see it, and who cashed in(Lewis 2010). In the economics profession only a few contrarians expected a crash, mainly Steve Keen in a blog (Keen 2007). Keen’s conclusions were based on a theory due to Hyman Minsky (who died in 1996), (Minsky 1982, Minsky 1986). At the Fed nobody saw it coming. Cairman Greenspan said, in Congressional testimony in June 2005, that there was no housing bubble, merely “signs of froth in some local markets” (Greenspan 2005).  This happened just before the peak. The failure of the entire economics profession to expect trouble in 2007 is a continuing source of embarrassment among theorists (Keen 2017).

# # #

Photo credit: Nicholas Kamm/AFP/Getty Images


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