Is it going to be a gusher? One of the expected outcomes of the tax cut legislation passed last year was that US corporations who held approximately $3 trillion of cash offshore would bring it back onshore. It turns out (surprise, surprise) that incentives work. US corporations historically were incented to keep offshore earnings away since the 35% stated corporate income tax rate on that income applied as it was brought home. Incentives changed when US legislators cut the stated corporate income tax rate to 21% and then applied a lower 15.5% on existing earnings that were brought back. We are starting to see the flows. According to the Federal Reserve, corporations subtracted a little less than $160 billion from foreign earnings held abroad in the first 3 months of 2018. Stated as a percent of GDP (annualized 3.4%), it is the largest repatriation since 1946 and much larger than the last repatriation-inducing tax cut in the mid-2000s under President George W. Bush.
We were reminded this week at a lunch with President Bush’s lead economic advisor during the last tax cut that government deficits are not inherently bad. It is all about context. As a metaphor, using debt to finance a project is not wrong but it is about balance (how much debt) and whether the project will create return in the future. Productive use of the financial capital that companies are repatriating such as hiring, capital expenditures, or research for innovation can help drive economic growth going forward. If the opportunity is wasted, we are all going to feel a bit hosed.