Why you should care

Because some argue that reform could boost investments at a time when the global economy is increasingly shaky.

By Simon Constable

The Daily DoseMAR 28 2016

Simonomics: A look at the global economy from a former staff columnist at The Wall Street Journal.

Trumpisms, verbal attacks and aggressive stances for taking down ISIS have all been shared on Republican debate stages of late. But one sentiment has largely been missed: that time when GOP candidates tried to knock out their opponents using a serious discussion of personal and corporate taxes.

While there’s little agreement across party lines on personal taxes, there may be some consensus on the business front. “Corporate taxes are the one area [where] there could be tax reform,” says Bill Cobb, CEO of tax preparer H&R Block. Cobb should know. He routinely roams government hallways, keeping his finger on the policy-change pulse. And it seems that this election cycle some candidates are pushing to fix a unique U.S. tax wrinkle: the double taxation of offshore corporate profits, even though the companies have already paid local taxes in other countries.

Before he dropped out, Chris Christie was perhaps the most vocal against a double-tax scenario. Earlier this year he noted that it’s led American companies to keep more than $2 trillion offshore because they don’t want to pay the second tax. “And who can blame them?” he said. In addition to the usual conservative lower-the-tax-rate mantra, Christie called for “a one-time repatriation of that money.” To put that $2 trillion figure in perspective: In 2015, investment in things like factories and equipment was $2.3 trillion, according to the St. Louis Federal Reserve. Or, put another way, that sum is about 13% of the U.S. economy.

Until we see capacity and confidence rising, I don’t see business investment rising.

Lakshman Achuthan, president of the New York–based Economic Cycle Research Institute

So, presumably, repatriating that cash could spark an investment-led boom. “Yes investment is a big driver of the business cycle,” says Lakshman Achuthan, president of the New York–based Economic Cycle Research Institute. The amount of investment in the economy tends to vary much more than consumption by households, so it could grow the economy. But what determines whether companies invest? Achuthan says cash is necessary but not sufficient on its own. Two additional criteria need to be met. The first is a shortage of production capacity, such as factories (but that’s not happening; in fact, utilization is falling). The second is business confidence that demand for products will improve, and ECRI hasn’t been seeing that either. “Until we see capacity and confidence rising I don’t see business investment rising,” says Achuthan.

Still, wouldn’t a temporary tax abatement on foreign profits help? Steve Blitz, chief economist at ITG, isn’t convinced. He says if low interest rates — around 2 percent on the 10-year Treasury — aren’t boosting private capital spending, then it’s far from clear that repatriating these funds would do the trick. Theoretically, cheaper borrowing costs make potential projects more economically viable, but they don’t substitute for robust demand. “I have never really believed that allowing these funds to return will suddenly boost spending on plant and equipment,” he says.

On top of these concerns there’s the issue of whether the money is truly trapped abroad. “Implicit here is that money saved somehow sits idle. No, it doesn’t,” says John Tamny, author of the book Popular Economics. Instead, he adds, it’s immediately being lent, and the “odds are very strong that some of it is being lent to U.S. companies right in the United States.”

If there were to be a tax deal from a new president, the amount repatriated might be quite modest, say between $250 billion and $500 billion, says Joe Brusuelas, chief economist at professional services firm RSM. And even then, it may simply substitute for investments that were already planned. In other words, no big boost is likely. Instead, it may be better for the next commander-in-chief to ask for a tax change on the grounds of fairness.