Tax Exemption for Repatriated Foreign Earnings: Proposals and Analysis

Tax Exemption for Repatriated Foreign Earnings: Proposals and Analysis

Order Code RL32125
CRS Report for Congress
Received through the CRS Web
Tax Exemption for Repatriated Foreign Earnings:
Proposals and Analysis
Updated April 27, 2006
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Tax Exemption for Repatriated Foreign Earnings:
Proposals and Analysis
Summary
An important feature of several broad business and international tax bills in the
108th Congress has been their different proposals to reduce the tax U.S. firms pay on
dividends they receive from their overseas subsidiaries. Most prominent were S.
1637 as passed by the Senate, the House-passed version of H.R. 4520, and the broad
business tax bill that was approved in October, 2004 — the American Jobs Creation
Act (P.L. 108-357). The proposals 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 “deferral.” Although the tax code in some cases
denies deferral to passive investment income, the benefit is generally available for
active 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 postponed tax 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. A permanent
rather than temporary 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 is not clear whether U.S. firms
would use the repatriated funds to finance investment or 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 not be
updated.

Contents
Deferral
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Proposals in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Conference Agreement (P.L. 108-357) . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Economic Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Impact on Repatriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Impact on the Domestic Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Tax Exemption for Repatriated Foreign
Earnings: Proposals and Analysis
The 108th Congress has considered several bills containing a variety of
provisions that affect international business and investment; its deliberations
culminated in the enactment of a broad business- and international-tax bill in
October, 2004, as the American Jobs Creation Act (H.R. 4520; P.L. 108-357). A
principal impetus for the bills was 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 addressed the dispute by repealing ETI. However, the bills also
contained 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 was 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 — a proposal that was included in P.L. 108-357. Different
variations on this concept were contained in several of the ETI bills that preceded
P.L. 108-357: the initially introduced version of H.R. 2896 (Thomas; the provision
was not included in a later version of H.R. 2896), S. 1475 (Hatch); S. 1637 (Grassley;
approved by the full Senate in May, 2004), and H.R. 4520, a revised version of H.R.
2896 that was approved by the full House in June. 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 will or will 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 may decline from levels that would otherwise
occur, and the stimulative impact of the repatriations on the U.S. economy may be
muted.

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

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Proposals in the 108th Congress
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. Subsequently, a tax cut
for repatriations was included in several bills that address the ETI controversy while
also proposing a number of domestic and foreign investment incentives. The most
prominent of these were S. 1637 (Senator Grassley; approved by the full Senate on
May 11, 2004) and H.R. 4520 (Representative Thomas; passed by the House in
June). The tax cut for repatriations would be temporary in the case of each bill, as
was the tax cut that was included in the conference agreement on H.R. 4520 and that
was signed into law. An additional proposal that was prominent in the legislative
debate on ETI did not propose to cut taxes on repatriations (H.R. 1769/S. 970; Crane
and Rangel in the House and Hollings in the Senate).
S. 1637 proposed to temporarily reduce the tax rate on repatriated dividends; As
passed by the House, H.R. 4520 proposed to provide a deduction delivering a tax cut
of similar magnitude. Specifically, H.R. 4520 would have provided an 85%
deduction, generally the equivalent of a 5.25% tax rate for a firm paying the top
corporate rate of 35% under current law [35% X (100% - 85%) = 5.25%]. S. 1637
proposed to replace the regular corporate income tax normally applicable to
repatriations with a 5.25% excise tax.
Both bills applied their reduced rate or deduction to the excess of some measure
of repatriated dividends over average repatriations during a base period. S. 1637
applied 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. H.R. 4520 limited its deduction
to dividends in excess of repatriations over the same base period, but with an ending
date of March 31, 2003. Both proposals also required firms to adopt domestic
investment plans for repatriations that qualify for the reduced tax. H.R. 4520 added
an additional cap, limiting its deduction to the greater of $500 million or the amount
of earnings shown to be permanently reinvested in outside the United States in a
firm’s books of account.
Each of the bills generally denied foreign tax credits for foreign taxes paid on
repatriations that qualify for the reduced rate or the deduction. S. 1637 also reduced
the foreign tax credit limitation of firms using its reduced rate, thereby ruling out the
possibility of a double benefit. In addition, both H.R. 4520 and S. 1637 contained
a mechanism that was apparently intended to reduce the possibility of a firm’s
foreign tax credits reducing the benefit of the bills’ repatriation rate reduction or
deduction. The mechanisms generally worked by permitting a taxpayer to select
which dividends qualify for the benefit and which are not included because they do
not exceed the base period computation. Since only dividends exceeding the base
period amount qualifed for the bills’ reduced rate or deduction, 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

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dividends would be unshielded by foreign tax credits and could thus benefit from the
bill’s rate reduction. The proposals would not apply to retained earnings of foreign
subsidiaries that are subject to Subpart F.
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. As noted above, the repatriations
provisions under both S. 1637 and H.R. 4520 and also P.L. 108-357 would be
temporary. S. 1637’s reduced tax rate would apply only to repatriations occurring
over the course of a single year: the first tax year ending 120 days or more after the
bill’s enactment. H.R. 4520 would apply to repatriations over a six-month period
elected by the taxpayer, subject to certain conditions.
The Conference Agreement (P.L. 108-357)
The repatriation tax-cut that was adopted with P.L. 108-357 provides an 85%
deduction, as in the House bill. As with the House bill, this would deliver the
equivalent of a tax rate of 5.25% for a firm paying taxes on other income at the
generally-applicable 35% corporate rate. The deduction would be available for one
tax year. At the taxpayer’s option, the year would be the first tax year beginning on
or after P.L. 108-357’s date of enactment or the last tax year beginning before that
date.
As with both the House and Senate bills, the conference agreement limits
eligible dividends to repatriations in excess of a three-year base period, but with the
base period ending June 30, 2003. And as with the House and Senate bills, P.L. 108-
357 requires firms to adopt domestic investment plans for qualifying repatriations.
As with the House bill, the conference agreement limits the maximum deduction to
the greater of $500 million or the amount of earnings shown to be permanently
reinvested outside the United States in a firm’s books of accounts certified before
June 30, 2003. (The House bill, however, specified March 31, 2003.) As with the
House bill, foreign tax credits are denied with respect to the deductible part of
dividends, although taxpayers are permitted to choose which dividends comprise the
base-period amount and which are eligible for the deduction.
The conference report states the “conferees emphasize that this is a temporary
economic stimulus measure, and that there is no intent to make this measure
permanent, or to ‘extend’ or enact it again in the future.”1

1 U.S. Congress, Conference Committees, 2004, American Jobs Creation Act of 2004,
conference report to accompany H.R. 4520, H.Rept. 108-755, 108th Cong., 2nd sess.
(Washington: GPO, 2004), p. 314.

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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 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 have argued, will 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 (and that contained in the enacted measure) will
encourage firms to repatriate an additional $300 billion from overseas. The inflow,
it has been argued, will in turn result in an increase in domestic investment and
economic growth. It will also permit firms to pay down their debt, thus reducing
their risk of bankruptcy.2
Other analyses have been skeptical of the amount of repatriations the tax cut will
stimulate, and even if repatriations do increase, question whether the repatriations
will trigger an increase in investment within the United States. Critics have also
suggested that the proposals will 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.3
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
2 Senator John Ensign, Testimony Before the Senate Finance Committee, July 15, 2003.
Posted on the Committee’s website at [http://finance.senate.gov/hearings/testimony/
2003test/071503jetest.pdf]. See also Martin A. Sullivan, Tax Amnesty International: Relief
for Prodigal Profits, Tax Notes, May 5, 2003, pp. 603-608.
3 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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encourages U.S. firms to invest more capital than they otherwise would in overseas
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 1985.4 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
4 David G. Hartman, “Tax Policy and Foreign Direct Investment,” Journal of Public
Economics, vol. 26, Feb. 1985, pp. 107-121.

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making new capital infusions from the United States abroad, and mature operations,
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 irrelevant
as in the new view; parent firms, for example, can borrow against their subsidiaries’
investments.5 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
5 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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likely be temporary and would likely not shift the long-run stock of investment from
foreign locations to the United States.
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.
Supporters of the repatriation tax holiday have argued that the provision did
indeed stimulate repatriations in 2005; one group has argued that “in response to
lower tax rates,” U.S. increased repatriations to $217 billion in 2005 compared to $36
billion in 2004.6 These amounts, however, are apparently those reported by the
Federal Reserve System for all repatriations, not just the increased amount that
occurred because of the tax cut.
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.
6 American Shareholders Association, APA Repatriation Scorecard: $217 Billion
Repatriated Back to America, At Least Another $100 Billion on Its Way. Posted at the
organization’s website, at [http://www.americanshareholders.com/news/ASA-repats-03-20-
06.pdf], visited April 28, 2006.

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As noted above, several of the bills — including the enacted version — 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
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 that the rate reduction in
S. 1637 would reduce revenues by $3.8 billion over 10 years (FY2004-FY2013); the
deduction in the House-passed version of H.R. 4520 would reduce revenue by $3.5
billion over 11 years (FY2004-FY2014), and the enacted measure in P.L. 108-357
is expected to reduce revenue by $3.3 billion over 10 years (FY2005-FY2014). The
estimates each of the bills show a similar pattern over time. Each 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 long-run estimated revenue loss from
the repatriation measure alone makes up only a small portion of the bill’s revenue
loss from all the bill’s revenue-losing items. 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 both the
House-passed bill are its rate reduction for domestic production and consolidation of
foreign tax credit limitations. Larger items in P.L. 108-357 are a deduction for
domestic production and consolidation of foreign tax credit limitations.