American companies such as Apple and Microsoft have huge cash reserves sitting overseas. President Trump keeps saying it’s as much as $5 trillion. But no one else seems to think it’s that high. Most on Wall Street say those overseas reserves total more like $2 trillion to $3 trillion. Whatever the exact figure is, it’s substantial.
Trump wants to bring that money back to the United States to spur jobs and growth, and he's been aggressively pitching a plan to offer companies a large tax break if they bring all those dollars back to America soon. Under Trump’s proposal, companies would only have to pay a 10 percent tax on money they bring back — a process often called “repatriation” — rather than the usual 35 percent. (Trump offered that 10 percent figure during his campaign. More recent White House documents don’t specify an exact tax rate.)
“We must bring back trillions of dollars in wealth that's parked overseas and just can't come back,” Trump said last week in North Dakota during a speech intended to rally support for tax cuts. “We’re going to get it done.”
Trump says middle-class Americans should not fret about giant corporations getting a steep discount on their tax bills. Once that money is on U.S. soil, Trump argues, companies will use it to build new factories and research centers and create more American jobs.
But there are a lot of reasons to be highly skeptical of Trump's repatriation plan. Chief among them is that U.S. companies have already told the world what they would do if they were granted a cheaper way to bring back trillions from overseas — and it wouldn't be hiring workers or making more investments in America.
When Bank of America Merrill Lynch surveyed more than 300 top U.S. companies this summer about their plans for Trump’s “tax holiday” on overseas cash, 65 percent said they would bring the money back to the United States and use it to pay down debt. The next most popular plan was to spend the money on stock buybacks — when companies purchase their own stock, driving up the price.
“Companies want to get their money back to buy stock and goose the stock price because their senior executives derive so much of their compensation from the stock prices,” said Edward Kleinbard, a tax law professor at the University of Southern California and former chief of staff for Congress’s nonpartisan Joint Committee on Taxation. “Their motives are completely suspect.”
These actions would make rich executives and shareholders wealthier by boosting the company stock price. They would not deliver a boon to workers — or the economy as a whole — as Trump is promising.
The White House tried this once before, and the results were grim. Trump frequently bashes former president George W. Bush, but this tax holiday for foreign profits is straight out of the Bush playbook. In 2004, Congress and Bush dropped the tax rate on foreign earnings to 5.25 percent for a short window in 2004-05. It resulted in a great payday for CEOs and Wall Street shareholders but did almost nothing to help workers.
Companies voluntarily brought more than $300 billion back to the United States during that window. The vast majority of it — 80 percent, according to Bank of America estimates — was used on share buybacks. “The last time this happened, you really saw a boost for the stock market,” Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch, said in August.
Even worse for U.S. workers, some of the companies that brought the most money back, such as Pfizer, Merck and Colgate-Palmolive, turned around and cut jobs in 2005 and 2006, according to a report by the nonpartisan Congressional Research Service.
Experts expect a similar result under Trump’s plan. “This policy is not one that’s going to drive growth,” said Alex Brill, a research fellow at the right-leaning American Enterprise Institute.
The reality is that companies that hold money overseas don't need the extra money from abroad to build a new factory in Indiana or Michigan, said Howard Silverblatt, a senior analyst at S&P Dow Jones Indices and one of the top experts in the country on the financials of big companies. “They have the ability to do it now.”
In recent years, many U.S. companies, including Apple, have been issuing a lot of debt. Interest rates are very low, so it’s cheap to borrow money. A company like Apple can keep most of its money overseas and just borrow in the United States when it wants to fund expansion at home.
Silverblatt and Brill predict that Trump’s plan would end up repeating what happened before: Companies will buy back more shares. The Bush plan actually tried to prevent companies from purchasing stock, but it was impossible to enforce.
“If that cash is freed up, investors will want that money,” Silverblatt said. He said the tax cut could also spur an uptick in mergers and acquisitions. In the Bank of America survey, 42 percent of companies said they would likely use money from overseas for mergers. Mergers often lead to job reductions, as the combined entities no longer need as many employees in such areas as IT, human resources or other staffs.
If Trump really wants to help working people with his tax holiday plan, Apple chief executive Tim Cook, who sits on the largest corporate cash pile, has some advice. In an interview with Bloomberg in June, Cook suggested making it mandatory for all companies to bring the money back and then for the government to spend the tax revenue it collects on building roads, bridges and other infrastructure.
The United States should “use that money for a significant infrastructure spend in the U.S., because it creates jobs,” Cook said.
Some top Republican leaders in Congress actually prefer Cook’s plan — to an extent. Congressional Republicans largely don’t want another voluntary tax holiday after seeing the effects of the Bush plan. Instead, they would rather make it mandatory for companies to repatriate overseas cash over the next decade as part of a broader plan to redo the entire corporate tax system.
A mandatory repatriation would bring in a lot more revenue than Trump's voluntary plan because $2 trillion to $3 trillion actually would come back to the United States — rather than the $300 billion the Bush administration saw. But instead of using the money for infrastructure, as Cook suggests, Republicans plan to use it to pay for deeper tax cuts, according to their tax blueprint from 2016, “A Better Way.”
“I would be shocked if we ended up with Trump’s temporary tax holiday,” Kleinbard said. “Republican leadership would be [throwing] away the revenue you need to make tax reform work.”