NCPA - National Center for Policy Analysis

Tax Law Discourages Return of Foreign Income

February 17, 2004

Remarkably, the U.S. corporate tax rate of 35 percent is the second highest in the 30-member Organization for Economic Cooperation and Development (OECD). This difference is cause for concern because the expense of higher "add-on" taxes has made multinational firms reluctant to bring home (or "repatriate") profits in excess of amounts protected by foreign tax credits, thus preventing important capital and investment from re-entering the country. Lowering taxes will help lure these profits back into the United States and would actually increase, and not decrease, government revenues.

According to Stephen Entin of the Institute for Research on the Economics of Taxation:

  • Reducing tax rates on foreign profits to 5.25 percent, the government's take on the ensuing inflow of income would generate about $10 to $12 billion a year in revenue -- annually dwarfing the projected 10-year revenue loss.
  • While it is true there are existing ways for firms to avoid taxes on foreign-earned profits, such arrangements are often prohibitively costly.
  • Reforming repatriation laws would boost domestic income and GDP.

Finally, Entin claims it is naive to assume that, in light of a tax reduction, companies will be emboldened to hold out for further amnesty in the future, thus delaying their taxable repatriations. In contrast, he says, there are ample investment opportunities worldwide which could profitably absorb all the future profits of U.S. multinational companies for decades.

Source: Stephen J. Entin, "Tax Law Discourages Companies from 'Bringing Home' Foreign Income," Heartland Institute, January 2004.


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