Federal Tax Law Change Brings $210 Billion in Profits Back to U.S.

Published October 1, 2005

Less than one year after the Invest in USA provision of the American Jobs Creation Act (AJCA) was signed into law, more than $210 billion of “foreign” profits have come back into the United States. Additional tens of billions of dollars are likely to be repatriated soon.

A report on the preliminary impact of the Invest in USA provision was issued August 23 by the American Shareholders Association (ASA).

The AJCA was signed into law by President George W. Bush on October 22, 2004. It included a provision allowing companies to repatriate their previously designated permanently invested foreign profits back into America at a 5.25 percent tax rate.

“The size of this repatriation shows how distorted our current tax regime is,” said Rep. Phil English (R-PA), a key sponsor of the legislation. “We think we should be looking at the corporate tax rate for a permanent fix. We need to lower the corporate tax burden so it’s more comparable to our trading partners. We also need to change the design of the corporate tax system.

“This repatriation will lower the cost of capital, create jobs, and significantly provide seed corn for some of the most dynamic sectors of our emerging economy,” English said. “We have seen a subsidence of some of the investments we saw in the 1980s. As result, we have seen the U.S. economy not enjoy as much growth as it did in the 1980s. As a one-shot deal, this will provide a significant boost to capital at a lot of firms, the benefits of which will be felt for years to come.”

Among Highest Tax Rates

Prior to passage of the legislation, U.S. subsidiary firms operating in foreign countries paid taxes on their profits to the host country, and if the company decided to bring the profits back into the U.S., it had to pay the difference between the foreign tax and the 35 percent tax rate in the United States. Because the United States has one of the highest corporate tax rates in the world, this encouraged U.S. companies to invest in foreign countries instead of at home.

The Invest in USA Act allows companies to reinvest their foreign profits back into the United States at a 5.25 percent rate for one year. Many companies are using the one-time provision to repatriate their profits back into America, bolstering new investment, job creation, and shareholder wealth that otherwise would not have occurred.

Among the ASA study’s findings:

  • according to the International Strategy and Investment Group, 91 companies listed on the Standard & Poor’s 500 have repatriated more than $210 billion that otherwise would have been invested in other countries;
  • the amount of repatriations already exceeds by 41 percent the official government forecast of $135 billion put forward by the Joint Committee on Taxation;
  • based on the number of technology companies that have yet to announce, $300 billion in repatriated profits is virtually certain and $350 billion is most likely to be reached;
  • $350 billion is 2.8 percent of U.S. Gross Domestic Product (GDP), which exceeds the three-year cumulative total of tax cuts in effect for the years 2003, 2004, and 2005.

Investment and Jobs

JP Morgan estimates the Invest in USA provision will increase GDP by an additional 1 percent over the next two years. JP Morgan further estimates $120 billion will be used for new investment, creating 500,000 new jobs over the next two years. The remaining funds are being used to shore up balance sheets, specifically pensions–a good thing for workers and companies given the current problems with defined benefit pension plans.

Higher than expected repatriations are also boosting tax revenues. The ASA estimates the repatriation provision will bring in an additional $20 billion in corporate tax revenue over what was expected. That does not include anticipated revenue gains from income, investment, and capital gains taxes.

Rep. Kevin Brady (R-TX), another key sponsor of the legislation, said, “I’m not surprised it’s performing as well as it is. It’s doing just what we anticipated. It made no sense to strand those profits overseas instead of having them go to work here.”

Brady said he believes the success of the profit repatriation “opens the door to a stronger effort for reform of the corporate tax system. Phil English and I have talked about this and have agreed we would like to make this permanent at some point.”

Daniel Clifton ([email protected]) is executive director of the American Shareholders Association.

For more information …

The American Shareholders Association’s August report on the Invest in USA provision is available online at http://www.americanshareholders.com/news/asa-repat-08-19-05.pdf.

Additional information on the repatriation of foreign profits may be found online at http://www.americanshareholders.com and www.house.gov/apps/list/press/pa03_english/def0805.html.