New $1.4 Trillion U.S. Stimulus Is in Sight: Douglas Holtz-Eakin

The U.S. economy is struggling. More than two years after the end of the recession, unemployment is stuck at more than 9 percent. Analysts are lowering their estimates of growth, which they now forecast will be even slower than the disappointing pace of 2011’s first half.

President Barack Obama’s approach is to double-down on the failed strategy that brought the U.S. to this point. More temporary tax breaks, targeted at favored constituencies. More infrastructure spending, destined to arrive in time for the 2014 midterm elections. More bailout dollars for states. Another destined-to-fail layer on the labyrinthian federal jobs-training program. In short, more than $400 billion -- and another partisan fight in Washington.

Why not try a new direction in economic policy? There is bipartisan consensus that the private sector -- not the government -- is the key to more jobs and faster growth. Obama is on record saying the private sector needs to be “the main engine of job creation.” Similarly, House Speaker John Boehner and Majority Leader Eric Cantor argue that “we must dedicate ourselves to pro-growth policies that help create middle-class jobs, make it easier for existing businesses to thrive and allow more start-up companies to flourish.”

Force for Growth

So it is mysterious that Congress and the president haven’t done more to unleash a potent force for faster economic growth: a reduced tax on repatriated earnings, or the profits U.S. companies are holding abroad that are exempt from federal income taxes. One proposal, the House Freedom to Invest Act of 2011, would reduce the tax on repatriated dollars to a maximum of 5.25 percent (from 35 percent). A similar bill was introduced in the Senate yesterday by Republican John McCain and Democrat Kay Hagan that would let companies bring profits back to the U.S. at an 8.75 percent tax rate, or 5.25 percent if they increase their payrolls by a specified amount.

Repatriation can be thought of as a private-sector approach to stimulus. The Obama administration’s proposed would be built on using federal-government cash flows to support new hiring, purchases of investment goods; as well as research and development. In the same way, a reduced tax on repatriated earnings would generate cash flows that would put resources in the hands of workers, their families and companies.

At the same time, some corporations may decide to use the money to retire debt, pay dividends or repurchase shares -- an action that is viewed as a fatal flaw by critics of a 2004 tax repatriation holiday. Research shows that 24 percent of those funds went to capital investment, and 23 percent supported job creation.

Not Good Enough

Not good enough, say critics. But these critics don’t cast their investigative net wide enough. In analyzing the U.S. government’s $787 billion stimulus of 2009, the Congressional Budget Office said “estimating the law’s overall effects on employment requires a more comprehensive analysis than can be achieved using the recipients’ reports.” In the same way, focusing narrowly on what individual companies do with their repatriated earnings misses the larger picture.

A more-thorough analysis recognizes that those financial transactions have two effects. First, they put resources in the hands of other businesses, households, pension plans and investors, who continue the chain of purchases and financial transfers. Second, actions such as share repurchases tend to raise stock prices. The increase in valuations provides wealth that supports household spending and consumer demand.

One approach to quantifying these effects is to use a formal macroeconomic model that captures the interconnections of demands and financial flows, just as the CBO did when assessing the impact of the stimulus bill.

JPMorgan’s Estimate

In short, a repatriation tax policy is desirable from several perspectives. First, cash otherwise trapped overseas -- perhaps even permanently -- would flow back into the U.S. JPMorgan Chase & Co. estimated that at least $1.4 trillion in undistributed foreign earnings is locked up abroad; Moody’s Investors Service warns that U.S. tech companies might hold as much as 79 percent of their cash overseas by 2013. I estimate that the short-run stimulus provided by repatriated dollars would speed the pace of economic recovery, increasing gross domestic product by roughly $360 billion and creating about 2.9 million new jobs.

Second, a reduced tax on repatriated earnings is a step toward a territorial tax system -- one with a permanent zero or very low tax on repatriation. This is exactly the tax system adopted by our international rivals. For the U.S. to remain out of step condemns our best workers and companies to a reduced ability to compete.

Finally, a new repatriation tax policy would contribute to a lower overall corporate-tax burden at a time when the high U.S. corporate-tax rate harms economic growth, the amount and quality of domestic investment, and the wages of American workers.

More rapid economic growth should be the top national priority, and the consensus in Washington is that the focus should be on private-sector initiatives. Repatriation meets today’s need for more jobs and tomorrow’s demand for a competitive tax code.

(Douglas Holtz-Eakin, who was the director of the Congressional Budget Office from 2003 to 2005, is the president of the American Action Forum, a public-policy institute. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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