Order Code RL32125
CRS Report for Congress
Received through the CRS Web
Tax Exemption for Repatriated Foreign Earnings:
Proposals and Analysis
October 22, 2003
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Tax Exemption for Repatriated Foreign Earnings:
Proposals and Analysis
Summary
A prominent feature of several broad business and international tax bills in the
108th Congress is their different proposals to reduce the tax U.S. firms pay on
dividends they receive from their overseas subsidiaries. The proposals (contained in
S. 596, S. 1475, S. 1637, H.R. 767, H.R. 1162, and H.R. 2896) fit into the U.S. tax
structure as follows: while the United States taxes corporations that are chartered in
the United States on their worldwide income, it does not tax foreign-chartered
corporations on their foreign-source income. Thus, with some exceptions, if a U.S.
firm conducts its foreign business through a foreign-chartered subsidiary corporation,
its overseas earnings are not subject to U.S. tax as long as the income remains in the
hands of the foreign subsidiary and is reinvested abroad. The income is subject to
U.S. tax only when it is ultimately repatriated to the U.S. parent corporation as
dividends or other intra-firm payments. At that point, U.S. taxes ordinarily apply,
although credits may be claimed for foreign taxes paid. It is these U.S. taxes due
upon “repatriation” that would be reduced under the proposals.
The feature of the U.S. tax code that allows U.S. firms to postpone taxes on their
overseas earnings is known as the “deferral principle,” or simply “deferral.”
Although the tax code’s Subpart F provisions in some cases deny deferral to passive
investment income, the benefit is generally available for business income earned
through foreign subsidiaries. In general, deferral poses a tax incentive for U.S. firms
to invest in foreign countries with low tax rates. This is because a tax whose
payment can be postponed matters less to a firm than a tax that is paid currently; as
long as payment is postponed, a firm can invest and earn a return on what would
otherwise be spent on taxes. Supporters of a tax cut for repatriated dividends argue
that the tax that applies to repatriated dividends is a part of deferral’s tax incentive
to employ capital abroad. They argue that the tax on repatriations discourages U.S.
firms from repatriating their foreign earnings. In some cases, they point out, U.S.
firms confront the choice of reinvesting a given amount of foreign profits in a low-
tax foreign country without immediately paying U.S. tax, or of triggering U.S. tax by
paying dividends to the U.S. parent. The U.S. tax, it is argued, discourages
repatriation, and has induced some U.S. firms to accumulate large stocks of
reinvested earnings abroad. Reducing the tax, it is argued, will stimulate a flow of
earnings back to the United States and will increase investment in the United States.
According to economic theory, a temporary tax cut for repatriations may induce
a near-term increase in dividend remittances to U.S. parent firms from abroad as long
as it is temporary. A permanent tax cut, however, may have no impact on
repatriations, while at the same time inducing firms to increase new capital outflows
from the United States to locations abroad. If repatriations occur, it not clear whether
U.S. firms would use the repatriated funds to finance investment or would put them
to other uses — for example, the payment of dividends to stockholders. In the area
of economic stimulus, some or all of the stimulative impact of repatriations may be
offset by exchange rate adjustments that would reduce net exports.
This report will be updated as legislative events occur.

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Contents
Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Impact on Repatriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Impact on the Domestic Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Tax Exemption for Repatriated Foreign
Earnings: Proposals and Analysis
The 108th Congress is considering several bills containing a variety of provisions
that affect international business and investment. A principal impetus for the bills
is the controversy between the United States and the European Union over the U.S.
extraterritorial income (ETI) tax benefit for exports; each of the bills address the
dispute by repealing ETI. However, the bills also contain numerous tax benefits and
investment incentives designed, in part, to offset the economic effects of ETI’s
repeal. In the international area, one of the most prominent proposals is a plan to
reduce the U.S. tax that U.S. firms pay when their overseas operations remit
(“repatriate”) their foreign earnings as dividends to their U.S. parent corporations.
Different variations on this concept are contained in several of the ETI bills: the
initially introduced version of H.R. 2896 (Thomas), S. 1475 (Hatch); and S. 1637
(Grassley; approved by the Senate Finance Committee on October 1).1 Earlier
versions of the plan were contained in the Senate-passed version of the May, 2003
tax cut bill (P.L. 108-27; the Jobs and Growth Tax Relief and Reconciliation Act,
or JGTRRA) and in H.R. 767 (English), H.R. 1162 (Smith), and S. 596 (Ensign).
Proponents of the tax cut for repatriations argue that the provisions will result
in increased repatriations of funds U.S. firms would otherwise reinvest abroad, thus
boosting U.S. domestic investment. As detailed below, however, economic analysis
suggests that the impact of the tax cut depends heavily on whether it is temporary or
permanent. (Most of the legislative proposals would provide a temporary rather than
permanent reduction.) A temporary tax cut may indeed trigger increased
repatriations, although whether U.S. firms would use the funds to finance increased
investment is uncertain. A permanent tax cut on repatriations would likely have no
impact on repatriations and may encourage U.S. firms to increase their level of new
investment abroad.
But whether the tax cut would or would not stimulate repatriations may not be
the key to the proposal’s effect on U.S. economic growth. First, even if sizeable
repatriations occur, the rate of return available from U.S. investment will not be
altered by the repatriations; it is thus possible that the bulk of the repatriations will
be remitted to stockholders or used to pay down corporate debt. Second, when the
repatriations occur, those that are denominated in foreign currencies will be
converted to dollars, which may drive up the price of the dollar in world currency
markets. As a result, U.S. net exports would decline from levels that would
1 Press reports indicate, however, that a revised version of H.R. 2896 does not contain the
tax cut for repatriations. Alison Bennett, “Ways and Means Sets Oct. 27 Markup for
Controversial Export Tax Repeal Bill,” BNA Daily Tax Report, Oct. 20, 2003, p. G-6.

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otherwise occur, and the stimulative impact of the repatriations on the U.S. economy
may be muted.
Before discussing this analysis in detail, however, we look first at the U.S.
international tax structure and how each of the repatriation proposals would alter it.
Deferral
The United States bases its jurisdiction to tax international income on residence;
it thus taxes U.S. chartered corporations on their worldwide income, but does not tax
foreign corporations on their foreign-source income. Accordingly, a U.S. firm with
overseas operations can indefinitely postpone its U.S. tax on its foreign income by
conducting its foreign operations through a foreign-chartered subsidiary corporation.
As long as its foreign earnings remain in the hand of the subsidiary and are reinvested
abroad, U.S. taxes do not apply. The firm pays taxes on its overseas earnings only
when they are remitted from the foreign subsidiary to the domestic U.S. parent as
intra-firm dividends or other income.
Another prominent feature of the U.S. tax system that deserves mention here is
the foreign tax credit, a provision designed to alleviate double taxation where U.S.
and foreign governments’ tax jurisdictions overlap. Under its terms, U.S. taxpayers
can generally credit foreign taxes they pay against U.S. taxes they would otherwise
owe. Foreign taxes, however, can only be credited against the portion of U.S. tax
that falls on foreign-, rather than domestic-source income; when a firm’s foreign
taxes exceed U.S. tax on foreign income, the excess cannot be credited in the current
year. Accordingly, a firm pays total taxes — U.S. plus foreign — on its foreign
income taxes at an average rate that is equal to either the U.S. tax rate, or the foreign
tax rate, whichever is higher.
With respect to repatriated dividends, U.S. firms can claim “indirect” foreign
tax credits for foreign taxes paid by their subsidiaries on the earnings out of which
the repatriated dividends are paid. Thus, for investment that uses the deferral
principle, a U.S. firm pays taxes at the higher of the U.S. or foreign rate; the U.S.
component, however, is paid on a deferred basis. As described more fully below, this
ability to defer U.S. tax poses an incentive for U.S. firms to invest abroad in
countries with low tax rates. The proposals to cut taxes on repatriation are based on
the premise that even this deferred tax on remitted dividends discourages
repatriations and encourages firms to reinvest foreign earnings abroad and that a cut
in the tax would stimulate repatriations.
An exception to the deferral principle is provided by the tax code’s Subpart F
provisions, which were first enacted in 1962 as a means of discouraging U.S. firms
from accumulating tax-deferred income in subsidiaries located in offshore “tax
havens.” Under Subpart F, certain types of income are subject to U.S. tax, whether
they are repatriated or not. Subpart F income generally includes income from passive
investment (e.g., interest, rents, royalties, and dividends from unrelated corporations)
as well as several other types of income whose geographic source is thought to be

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easily manipulated. In general, however, income from active business operations is
outside the scope of Subpart F and can benefit from deferral.

Current Proposals

Early in 2003, three bills were introduced that proposed reduced taxes on
repatriations: H.R. 767 (English); H.R. 1162 (Smith); and S. 596 (Ensign).
Subsequently, the Senate version of JGTRRA would also have reduced taxes on
repatriations, but the measure was dropped in conference. More recently, a tax cut
for repatriations was included in three bills that address the ETI controversy while
also proposing a number of domestic and foreign investment incentives: H.R. 2896,
as initially introduced ( Thomas); S. 1475 (Hatch); and S. 1637 (Grassley; approved
by the Senate Finance Committee on October 1). A fourth ETI proposal (H.R.
1769/S. 970; Crane and Rangel in the House and Hollings in the Senate) would not
cut taxes on repatriations.
The bills proposing to cut repatriation taxes would either reduce the tax rate on
repatriated dividends or provide a deduction that delivers a tax cut of similar
magnitude. One bill (H.R. 2896, as originally introduced) would provide an 80%
deduction, generally the equivalent of a 7% tax rate for a firm paying the top
corporate rate of 35% under current law [35% X (100% — 80%) = 7%]. The
remainder of the bills would apply either a 5.25% rate or an 85% deduction, which
delivers its equivalent.
Most of the bills apply their reduced tax rate or their deduction to the excess of
some measure of repatriated dividends over average repatriations during a base
period. To illustrate, S. 1637 applies its reduced rate only to repatriations in excess
of average repatriations in three of the five most recent taxable years ending before
January 1, 2003, with the highest and lowest repatriation years disregarded.2 For
example, H.R. 2896 provides that qualifying dividends must be invested in the
United States pursuant to a plan approved by the firm’s chief operating officer and
board of directors. Most of the proposals also require firms to adopt domestic
investment plans for repatriations that qualify for the reduced tax. H.R. 2896 adds an
additional cap, limiting qualified repatriations to the amount of earnings firms
characterized in their most recent financial reports filed with the Securities and
Exchange Commission as having been permanently reinvested abroad. If a firm does
not contain such a characterization in its reports, qualified dividends are deemed to
be zero.3
2 S. 1475 does not limit eligible dividends to those exceeding repatriations in a base period,
but instead subjects eligible dividends to a cap equal to the excess of current year
“innovation expenses” over innovation expenses in a base period. Innovation expenses are
defined to include research and development outlays and generally new investment in
machines and equipment. S. 1475 also does not contain language requiring a domestic
investment plan.
3 H.R. 2896 also provides that if a firm’s actual repatriations dip below the base period
amount in any of the 10 years following the firm’s election year, the amount of the reduced
(continued...)

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Each of the bills generally denies foreign tax credits for foreign taxes paid on
repatriations that qualify for the reduced rate or the deduction. The bills containing
rate reductions rather than deductions also reduce the firms’ foreign tax credit
limitation, thereby ruling out the possibility of a double benefit. In addition, several
of the bills have a mechanism that is apparently intended to reduce the chance of a
firm’s foreign tax credits reducing the benefit of the bills’ repatriation rate reduction.
For example, S. 1637 provides that a taxpayer can select which dividends are counted
as simply meeting (but not exceeding) the base period computation and which are
treated as exceeding the base period amount. Since only dividends exceeding the
base period amount qualify for the bill’s reduced rate, a tax-minimizing firm would
choose dividends subject to high foreign taxes (and that are thus shielded from U.S.
tax by foreign tax credits) as being less than the base period amount and dividends
subject to low foreign taxes as exceeding the base amount. These latter dividends
would be unshielded by foreign tax credits and could thus benefit from the bill’s rate
reduction.4 S. 596 and H.R. 767 provide a slightly different mechanism with the
same effect; they provide that a firm’s maximum qualifying dividends are those
actually paid by the firm or a lesser amount of dividends designated by the firm.
The proposals would generally not apply to retained earnings of foreign
subsidiaries that are subject to Subpart F. The bills apply their reduced rate or
dividend deduction to dividends paid by foreign corporations; Subpart F generally
applies to the passive investment income of foreign subsidiaries before considering
whether distributions occur and without deducting dividends.
As noted in the analysis below, an important dimension of the proposals is the
time frame over which they would apply, and whether their reduction for repatriated
dividends would be permanent or temporary. This design feature could have an
important impact on whether firms respond to the tax cut with increased
repatriations; one line of economic reasoning suggests a temporary reduction is more
likely to stimulate increased repatriations. Of the proposals, S. 1475 would provide
a permanent tax reduction; the remaining plans would provide a tax reduction with
a duration that varies among the proposals from six months to one year.
3 (...continued)
tax is recaptured, along with an interest payment.
4 S. 596 and H.R. 767 contain a similar mechanism. S. 1475 does not limit qualified
dividends to those exceeding base period dividends. It does, however, permit a taxpayer to
designate which dividends qualified for the reduced repatriation rate — a mechanism with
a similar effect to those in the other bills.

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Economic Effects
The Debate
Supporters of a tax cut for repatriated dividends have argued that the imposition
of U.S. tax on dividend repatriations discourages U.S. firms from remitting their
foreign earnings to the United States, and encourages them to reinvest the earnings
abroad. Cutting the tax on remitted dividends, they argue, would trigger a stream of
repatriations. According to one study cited by proponents, a one-year tax reduction
such as that in the proposals at hand would encourage firms to repatriate an
additional $300 billion from overseas. The inflow, it is argued, would in turn result
in an increase in domestic investment and economic growth. It would also permit
firms to pay down their debt, thus reducing their risk of bankruptcy.5
Other analyses are skeptical of the amount of repatriations the tax cut would
stimulate, and even if repatriations do increase, question whether the repatriations
would trigger an increase in investment within the United States. Critics have also
suggested that the proposals would provide a windfall gain to stockholders of eligible
corporations, since firms with existing foreign investments embarked on their
projects with the full expectation that the remitted profits would be subject to the full
U.S. dividend taxation and foreign tax credit system.6
Impact on Repatriations
The analysis here focuses on two questions. First, would either a temporary or
permanent tax reduction for repatriated foreign earnings result in an appreciable
increase in repatriations? Second, if such an increase does indeed occur, what would
be its impact on the domestic economy?
We begin by looking at the incentive effects of the current U.S. international
system, with the deferral system and indirect foreign tax credit described above.
Economic theory is relatively clear on the basic incentive impact of the system: it
encourages U.S. firms to invest more capital than they otherwise would in overseas
5 Senator John Ensign, Testimony Before the Senate Finance Committee, July 15, 2003.
Posted on the Committee’s web site at [http://finance.senate.gov/sitepages/hearing071503.
htm]. See also Martin A. Sullivan, Tax Amnesty International: Relief for Prodigal Profits,
Tax Notes, May 5, 2003, pp. 603-608.
6 Opponents of the proposals include the U.S. Treasury Department; see Alison Bennett and
Katherine M. Stimmel, “Finance Approves 19-2 Export Tax Bill with More Manufacturing,
Subpart F Relief,” BNA Daily Tax Report, Oct. 2, 2003, p. GG-2. For a description of the
pro and con arguments, see U.S. Congress, Joint Committee on Taxation, The U.S.
International Tax Rules: Background and Selected Issues Relating to the Competitiveness
of U.S. Businesses Abroad, JCX-68-03, July 14, 2003, pp. 39-42. For an overview of
legislative developments that is generally critical of the proposals, see Lee A. Sheppard,
“U.S. Repatriation Amnesty and Other Bad Ideas,” Tax Notes International, Sept. 8, 2003,
pp. 860-866. For a recent new article on the proposals, see Glenn R. Simpson and Rob
Wells, “Dueling Tax Cuts: Firms Accused of Using Shelters Lobby U.S. to Repatriate
Funds,” Wall Street Journal, May 19, 2003, p. A-2.

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locations where local taxes are low. The reason is that by using deferral, U.S. firms
can postpone payment of U.S. tax indefinitely, and because of discounting, called
“deferral principle” (or simply “deferral”) receive a tax benefit because taxes that are
postponed matter less to a firm than an equal amount of taxes paid currently;
postponed taxes can be invested by the firm and earn a return until they are actually
paid. Accordingly, deferral poses an incentive for U.S. firms to invest abroad in
countries with low tax rates over investment in the United States. According to
traditional economic theory, deferral thus reduces economic welfare by encouraging
firms to undertake overseas investments that are less productive — before taxes are
considered — than alternative investments in the United States.
An expansion in the scope of deferral — for example, a scaling back of Subpart
F — would likely increase net U.S. investment abroad. In general, repeal of deferral
would likely reduce overseas investment. But the proposals at hand would not repeal
deferral or alter its scope; they would change just one element of the tax-deferral
structure: the magnitude of taxes due on repatriation. Further, most of the proposals
would do so only temporarily. Thus, the analysis needs to be more detailed than one
that simply looks at the overall, general impact of deferral; it needs to isolate the
impact of the repatriation taxes in particular.
In recent decades, economists analyzing the impact of repatriations have
increasingly drawn an analogy between the decision of whether to repatriate earnings
and the decision a domestic corporation makes in whether to pay dividends to its
individual stockholders — an analogy developed by Hartman in 1985.7 In the
domestic setting, the “new view” or “trapped equity” of dividends holds that taxes
on dividends have no bearing on the payout decision because once equity enters a
corporation, taxes must inevitably be paid when the funds’ earnings are paid to
stockholders. In the international setting, the new view similarly notes that once a
firm makes an initial infusion of equity capital in a foreign subsidiary, home-country
taxes must inevitably be paid when the investment’s earnings are repatriated (that is,
as long as the firm does not have sufficient foreign tax credits to offset U.S. taxes due
on repatriated dividends). Given this inevitability, once the capital is abroad,
repatriation taxes have no impact on the firm’s decision whether to repatriate foreign
earnings in the present or to instead reinvest them abroad. This irrelevance holds as
long as the investing firm does not expect the tax laws or its circumstances (for
example, its foreign tax credit position) to change.
Given that repatriation taxes are inevitable once capital is infused in a foreign
subsidiary, the new view holds that it makes no sense for a firm to simultaneously
send new equity capital abroad while repatriating earnings that are already overseas.
A firm’s foreign operations will instead tend to follow a life cycle, with initial
infusions of capital that occur as long as there are sufficiently profitable foreign
investment opportunities, followed by a period when retained earnings are sufficient
to fund the firm’s declining investment requirements, and repatriations occur. The
new view thus distinguishes between young foreign operations, where U.S. firms are
making new capital infusions from the United States abroad, and mature operations,
7 David G. Hartman, “Tax Policy and Foreign Direct Investment,” Journal of Public
Economics, vol. 26, Feb. 1985, pp. 107-121.

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who retain earnings to finance their foreign investments and who make repatriations.
The new view here produces its first conclusion regarding the impact of a change in
repatriation taxes: permanent reductions in taxes on repatriated dividends will likely
lead to increased overseas investment by young firms; it will likely lead to no change
in repatriations by mature foreign operations. In the latter case, the reduction in taxes
will simply be manifest in windfall gains to the firms’ stockholders.
The result is different for a temporary tax cut, at least in the short run. The
irrelevance of repatriation taxes depends on the taxes being the same whether the
earnings are repatriated in the present or the future; if taxes are temporarily reduced,
this condition no longer holds, and a firm with mature foreign operations may gain
by advancing repatriations. For young operations, a temporary tax cut may have no
impact as long as the reduction expires before the firm plans to begin repatriating
profits. Note that this result is similar to the impact of repatriation taxes on firms
whose foreign tax credit status changes from year to year. In one year, such a firm
might have foreign tax credits sufficient to avoid any repatriation taxes; in a
subsequent year, a firm might not have enough foreign tax credits to offset all U.S.
tax that would be due on repatriations. Such firms are thought to adopt an
intermittent pattern of repatriations, sending funds home from abroad in years when
foreign tax credits are plentiful and reinvesting funds when they are not.
It is possible, however, that this temporary increase in repatriations might
reverse after the tax cut expires, with repatriations declining below levels that
otherwise would have occurred. As a result of the temporarily increased
repatriations, the repatriating firms’ investment stock may decline, thus increasing
the pre-tax return that stands to be earned by additional retained earnings. It may
thus be profitable to follow an increase in repatriations with an increase in retained
earnings. In effect, the temporary increase in repatriations will have accelerated or
“borrowed” repatriations from future time periods.
In its international setting, the results of the new view of dividends has been
supported by an increasing body of theoretical and empirical work. For example,
studies have identified several means by which overseas subsidiaries can repatriate
earnings while avoiding repatriation taxes, thus making repatriation taxes irrelvant
as in the new view; parent firms, for example, can borrow against their subsidiaries’
investments.8 However, in the traditional view firms simultaneously send new
capital abroad and repatriate earnings, a means, perhaps, of signaling profitability to
its home-country managers and owners. There is also no distinction between young
and mature foreign operations. Under this analysis, a permanent reduction of
dividend taxes might cause earnings to be repatriated, but would also result in a new
increase in U.S. firms’ overseas investment. A temporary tax cut might likewise
temporarily increase repatriations, but, as under the new view, the increase would
likely be temporary and would likely not shift the long-run stock of investment from
foreign locations to the United States.
8 Harry Grubert and John Mutti, Taxing International Business Income: Dividend Exemption
versus the Current System (Washington: American Enterprise Inst., 2001), p. 19. For a
summary of research on the international version of the new view, see Rosanne Altshuler,
“Recent Developments in the Debate on Deferral,” Tax Notes, April 10, 2000, pp. 255-268.

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In short, then, a temporary cut in taxes on repatriation may stimulate a
temporary increase in repatriations, but according to a prominent strain of economic
theory, a permanent tax cut — or a tax cut that is perceived by investors as one that
will ultimately become permanent — will have no impact. If, however, the enacted
tax cut were to be temporary, what might be the magnitude of repatriations it would
trigger? As noted above, supporters of the tax cut have cited a Smith/Barney study
that indicates a pool of $300 billion in earnings has been reinvested abroad that
would potentially benefit from the tax cut, if it were enacted. Data compiled by the
Department of Commerce Bureau of Economic Analysis suggests the stock of
unrepatriated earnings is at least that large: at year-end 1999, the stock was $403
billion; rough estimates suggest the stock grew to around $639 billion by year-end
2002. Given that approximately 75% of foreign income is earned by firms without
sufficient foreign tax credits to offset U.S. tax, these figures suggest that around $479
billion of earnings have been retained abroad that would be subject to U.S. tax on
repatriation. Again, however, this figure represents simply the pool of funds in a
position to take advantage of the tax cut and not the volume of funds that would be
repatriated.
Impact on the Domestic Economy
If the tax cut were to indeed stimulate increased repatriations, what would be its
likely impact on the domestic economy? First, traditional economic theory is
skeptical of the ability of repatriations to stimulate domestic investment. The
reasoning is as follows: firms undertake investments based on the prospective
attractiveness of investment opportunities, on the one hand, and the return savers
(i.e., stockholders) require of their corporate-sector investments, on the other. An
increase in cash flow in the form of larger repatriations would change neither the
return that can be generated by domestic investment opportunities nor the return
required by savers. Thus, the repatriation is thought unlikely to stimulate an increase
in domestic investment. Rather, the repatriated dividends are more likely to be put
to other uses: for example, the payment of dividends to existing stockholders or
paying down of debt.
As noted above, several of the bills make the availability of the tax cut
contingent on the repatriating firm adopting a plan for investing the repatriated funds.
However, even the presence of such a plan may not induce a firm to increase its
investment or, in effect, to use its repatriated funds to finance domestic investments.
The reason is the fungibility of corporate funds; resources repatriated from abroad
can finance domestic investment no more or no less effectively than funds whose
origin is the United States. Thus, for example, a firm could adopt a plan that
dedicates the repatriated funds to investment but at the same time it could switch
domestic-source funds to other uses — for example, the payment of dividends.
(Fungibility and related concepts also question the efficacy of several other
mechanisms designed to augment their effect: for example, the limitation of qualified
dividends to an excess over a past base period; and the linking of the tax cut to the
presence of funds characterized as permanently reinvested abroad.)
Economic theory is also skeptical of the impact of an increase in repatriations
as an economic stimulus because of the likely effect of repatriations on exchange
rates and — in consequence — on trade. The adjustments work as follows: when the

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earnings of foreign subsidiaries are repatriated, they are converted from foreign
currencies to U.S. dollars; the increased demand for dollars drives up the price of the
dollar in foreign exchange markets. As a consequence of the dollar’s appreciation,
U.S. exports become more expensive for foreign buyers (and imports become
cheaper for U.S. buyers). U.S. exports would thus temporarily decline, which would
place a drag on the economy that would fully or partly offset any stimulative effect
from the injection of repatriated funds into the economy.
The repatriation proposals would also likely have an impact on U.S. tax
revenues. The Joint Committee on Taxation has estimated the revenue impact of two
of the proposals: the repatriation tax cut in H.R. 2896 (the Thomas bill) and that in
S. 1637 (the Senate Finance Committee bill).9 According to the estimates, the
dividend provision of H.R. 2896 would reduce taxes by $2.9 billion over 10 years;
S. 1637 would reduce revenue by $3.8 billion over the same period. The slightly
larger impact of the Finance Committee bill is perhaps a result of its slightly larger
reduction in the applicable tax — to 5.25% rather than the equivalent of a 7% rate
mandated by the Thomas bill. Beyond this, the bills show a similar pattern over time.
Both are estimated to actually increase tax revenues in their first year, probably
reflecting an underlying assumption in the estimates that repatriations would initially
increase. In subsequent years, the proposals are predicted to reduce revenues by
gradually diminishing amounts, which likely reflects an assumption that at least part
of the initial increase in repatriations would be drawn from repatriations that would
have been made in subsequent years. In the case of each bill the 10-year revenue loss
from the repatriation measure alone makes up only a small portion of the bill’s
revenue loss: 3.6% in the case of the Finance bill and 1.7% in the case of the Thomas
measure. (For example, larger revenue-losing items in S. 1637 include a deduction
for income from domestic production and an extension of the carryforward period for
foreign tax credits. Larger items in H.R. 2896 are its more generous depreciation
allowances and repeal of Subpart F’s coverage of certain types of sales and service
income.)
9 Joint Committee on Taxation, Estimated Revenue Effects of H.R. 2896, the American Jobs
Creation Act of 2003, JCX-71-03, Aug. 1, 2003; and Estimated Revenue Effects of
Modifications to the Chairman’s Mark of S. 1637, the Jumpstart Our Business Strength
(JOBS) Act, JCX-86-03, Oct. 1, 2003.

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