Surprised? US Multinationals Didn't Repatriate a Gusher of Cash

Despite the Tax Cuts and Jobs Act of 2017 (TCJA), US multinational companies (MNCs) did not repatriate a gusher of cash from their operations abroad during the first half of 2018. According to the Bureau of Economic Analysis, US MNCs repatriated $465 billion, substantially more than the $73 billion repatriated in the first half of 2017, but a small fraction of the cash tsunami that President Donald Trump anticipated.¹ In August 2017, Trump declared, "We expect to have in excess of $4 trillion brought back very shortly." However, repatriations in the second quarter of 2018, at $170 billion, were less than the $295 billion repatriated in the first quarter of 2018. The prospect of huge repatriations may have helped sell the TCJA, but the new tax law provided no compelling reason for MNCs to bring buckets of cash back home.

According to contemporary estimates, at the end of 2017, MNCs held about $3 trillion of unrepatriated earnings abroad. A good share of this accounting figure was reinvested in property, plant, equipment, and intangible assets abroad, leaving well under $2 trillion in cash and liquid assets available for repatriation.² At a maximum, MNCs might repatriate under $2 trillion in ready cash and liquid assets, about half of Trump's claim.

But TCJA provided no direct incentive to repatriate any part of the past earnings horde, as noted in an earlier blog post shortly after the law was enacted. The TCJA imposed a one-time 15.5 percent tax on cash and liquid assets accumulated abroad between December 1986 and December 2017, and an 8 percent tax on income reinvested abroad over the same period, payable over the next decade and costing MNCs an estimated $339 billion. Prior to January 1, 2018, the tax code permitted US MNCs to keep their accumulated earnings abroad indefinitely, never subject to US tax until they repatriated these earnings. Under the TCJA, taxes will be due whether or not funds are repatriated. The TCJA provided no additional benefit for repatriation. Moreover, Fed economists have argued that repatriated funds are more closely associated with share buybacks than real investment.³

The TCJA did provide a strong incentive for investment in the United States by slashing the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. During the first half of 2018, gross private domestic investment in structures, equipment, and intellectual property reached $5,510 billion, an 8 percent year-on-year increase. However, inward foreign direct investment (FDI) has not been particularly buoyant. In the first half of 2018, inward FDI was $83 billion, much less than $209 billion in the first half of 2017. The Trump administration's protectionist trade policies probably created so much uncertainty that foreign MNCs pulled back from investing in the United States, despite the more favorable US corporate tax rate.

While the TCJA stimulated investment at home, and may attract inward foreign direct investment, easy credit meant there was no need for MNCs to fund their outlays by repatriating cash. In June 2018, the AA bond rate was 3.5 percent, considerably higher than the 2.6 percent rate in June 2017, but still well below historic norms. Perhaps the strong US economy relative to other countries may eventually prompt MNCs to repatriate over a trillion dollars of cash. If so, the spur will be differential credit and interest rate conditions, not TCJA tax incentives.

Notes

1. See Table 4. U.S. International Transactions in Primary Income, Bureau of Economic Analysis (accessed on September 19, 2018).  Prior to the release of official data for the second quarter 2018, the Wall Street Journalconducted a survey that likewise did not find a gusher of cash repatriations.

2. The Federal Reserve Board estimated that US MNCs held $1 trillion cash abroad by the end of 2017. See Michael Smolyansky, Gustavo Suarez, and Alexandra Tabova, "U.S. Corporations' Repatriation of Offshore Profits," Federal Reserve, September 4, 2018 (accessed on September 19, 2018).