tax holidays and US offshore cash

US treasury secretary Steven Mnuchin expects his tax holiday for offshore earnings to encourage repatriation of trillions of dollars, spurring investment in plants and equipment. He ignores, however, the fact that about half of this money is already in the USA, often invested in US treasury bills. 

US corporations are estimated to have accumulated up to $2tn within their foreign subsidiaries, pending tax reform. But much of it has already come home, to the extent that it is invested in US assets. It was always thus. A Senate report into the 2004/5 tax repatriation holiday found almost half the tax-deferred offshore funds of 27 surveyed companies were already held in US bank accounts or investments. ….

Repatriation of capital sounds more dramatic than it really is. All it may involve is a change in the ownership of the assets from an offshore offshoot to a US domestic corporation. ….

Mr Mnuchin may be destined to disappointment in hoping a tax holiday will spur spending on “capital goods and jobs”. However, he … will need all the investors in government debt he can get if his policies lead to a widening budget deficit.

Lex, “US offshore cash: Mnuchin’s mirage“, Financial Times, 1 May 2017 (gated paywall).

TdJ would add that a widening budget deficit will contribute also to a widening trade deficit.

Comments are closed.