Bring earnings back home
October 7, 2003

It looks as if the economy is finally starting to turn around, but there are still worries about whether we are now in what President Bush's detractors are calling a "jobless recovery."

His various economic advisers and spinmeisters assure us, of course, that we shouldn't worry about the unemployment rate because it is what they like to call a "lagging indicator" and will drop as folks sign up for the new jobs about to be created.
This may be true, but isn't all that comforting to folks waiting for those new jobs to be created.

Bush's political advisers do seem to sense that many voters would like to think their president not only understands that they want to get back to work but is doing just about everything he can to help.

One thing he could do would be convince Congress to change the rather peculiar tax policy that encourages U.S.-based companies to invest their foreign earnings abroad rather than here. Much of what one finds in the tax code these days seems less than rational, but few seem dumber than this provision.

Currently, U.S. companies that earn money overseas are forced to pay the equivalent of 35 percent in taxes to bring that money home. Most countries actually encourage businesses earning money abroad to repatriate it, but not us. We penalize any company dumb enough to want to bring money earned in, say, France back here.

It shouldn't take a rocket scientist to figure out that taxing money brought home will discourage people from bringing it home. Instead, it encourages them to reinvest it abroad in, say, China, Mexico or France. This, in turn, creates new jobs for Chinese, Mexican and French workers so that they can make things that can be shipped over here and sold to U.S. consumers in competition with things made here.

A tax policy encouraging all that makes sense if its goal is to assist our foreign competitors, but it makes no sense at all if our goal is to create jobs and wealth here. The tax does produce some revenue, but since taxes affect behavior its main impact is to keep capital out of this country.

Recent studies indicate, in fact, that there may be as much as $500 billion in earnings being held abroad and that if Congress were to lower the effective tax rate from 35 percent to, say, 5 or 6 percent, something like $300 billion to $400 billion of that money would come home. That is a lot of money even in today's world and, if it were brought back in a relatively short period of time, would provide a real economic boost here.

Though neither claims to be a rocket scientist, Sen. John Ensign (R-Nev.) and Rep. Phil English (R-Pa.) have managed to figure this out and are urging adoption of what they call the Invest in USA Act, which has actually made it through the Senate and could be tacked on to tax legislation slated for action in the House within the next couple of weeks,

The Ensign-English proposal would open a six-month window during which corporations with foreign earnings could bring their money home without paying huge chunks of it directly to the taxman. Indeed, they would lower the tax on repatriated funds from 35 percent to 5.25 percent during this period.

Independent estimates suggest that this reduction could lead to the creation of as many as 400,000 new jobs within the next two years. That would seem to be just what the country and Bush are looking for as 2004 approaches.

Some on the House Ways and Means Committee, however, aren't sure those jobs are important enough to justify a rate cut. Using the peculiar logic of Washington, they argue that the feds would lose tax revenue from the cut because the government would take in more money if folks would just bring their money back and pay the existing rate. Duh. The problem is, of course, that it isn't coming back and won't unless the rate is lowered. Anyone who thinks otherwise just doesn't live in the real world.

This would apparently include some in the Treasury Department, which, it is rumored, is opposed to the rate reduction for the same reason.

After all, who cares about 400,000 jobs when one's boss is facing re-election against a party already claiming he doesn't much care about such things? Looks as if there aren't any rocket scientists at Treasury. English, Ensign and the folks who might actually get those jobs can only hope there are one or two at the White House.