One part of the White House’s proposed tax reform framework would involve a “tax repatriation” holiday for U.S. corporations that are storing profits overseas. The logic is that offering a lower tax rate to corporations would entice them to bring money onshore that would then lead to the hiring of American workers.
The proposal re-ups a Bush-era policy that failed to boost job growth; the top 15 companies that took advantage of the repatriation holiday actually reduced their total employment of U.S. workers over the period of the policy.
Many of the corporations that took part in the tax holiday instead spent the money on stock buybacks, a way to enrich insiders and executives; among the top 15 beneficiaries, stock buybacks jumped 16 percent from 2004 to 2005 and 38 percent from 2005 to 2006.
On Thursday, White House National Economic Council Director Gary Cohn told CNBC’s Eamon Javers that it’s “fine” if corporations do the same thing after this tax holiday.
Eamon Javers: On the corporate side, your critics say on the repatriation of overseas assets that history would show that companies don’t always use those assets when they’re repatriated to invest in manufacturing and jobs and the things that you guys are talking about. They do share buybacks and other financial engineering. How can you guarantee that this won’t happen this time?
Gary Cohn: So look we’ve heard that numerous times. If that’s our worst-case scenario, that companies repatriate their money, and they use it for share buybacks and dividends, what happens? They buy back shares, they issue dividends. They pay the repatriation tax. We get another 20 percent tax on capital gains or dividends. And then the people that get that money back do what? They reinvest it back in the economy in new investments and new capital. We’re putting some very enticing rules into the system that will entice people to invest capital for the next five years. We’re giving people a five-year write-off that they can instantly expense. So look, if that happens, that’s fine. We know that that money will get invested right back into the economy, and drive jobs, drive economic growth, drive wages, and drive prosperity.
What Cohn is articulating is a version of the theory of trickle-down economics. The Center for Economic and Policy Research’s Dean Baker is skeptical of Cohn’s explanation of corporate behavior during another tax holiday.
“Cohn’s story on repatriation goes the wrong way for a supply-side tax cut,” he told The Intercept. “Insofar as the repatriation does lead to more money being paid out to shareholders as dividends or capital gains, and they spend a portion of this money, it leads to the higher interest rate and less investment story. Of course, if we feel the problem is the economy doesn’t have enough demand, this is fine, but the easiest way to generate demand with a tax cut is to give the money to low- and middle-income people who will spend almost all of it.”
William Lazonick, an economist at UMass Lowell who studies stock buybacks, was also skeptical of Cohn’s theory.
“Dividends flow as income to pension funds and mutual funds, but the gains from buybacks, which are reaped by selling shares, go to Wall Street bankers, hedge-fund managers, and top corporate executives who are positioned to time the selling of their shares,” he wrote to The Intercept. “Companies in the S&P 500 Index did about $4 trillion in buybacks in the decade 2007-2016, equal to about 54% of profits, and almost $3 trillion in dividends, another 39% of profits. Cohn is trying to perpetuate a myth that all financial flows end up in investment that generates value-creating employment for the middle class. It is clear, however, that much of the trillions of corporate cash that flows out of companies to shareholders ends up in the ‘war chests’ of corporate predators on Wall Street, who use their enhanced power to grab even more corporate cash for themselves.”
In a 2015 interview, former President Bill Clinton said that George W. Bush told him he was disappointed because corporations ended up using the repatriation holiday to boost executive pay and stock buybacks. Cohn seems to believe it wouldn’t be so bad to have a repeat of the Bush experience.