Will A Tax Repatriation Holiday Spur Investment?

If you ask a person who prefers to ignore data, the answer might be yes. If you ask a person who looks at the data, the answer is likely no. There are apparently a lot of the former [0]. Anyway, to some analysis. From the abstract of a paper by Dharmapala, Foley and Forbes entitled Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act:

This paper analyses the impact on firm behaviour of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. …

…The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

The paper is forthcoming in the Journal of Finance, hardly a left-wing publication. Table 3 in the NBER WP version of the paper shows the impact of repatriations (normalized by lagged assets), and other control variables, on capital investment, employment, and R&D. The table might be a little hard to read, but the critical point to take is the absence of any asterisks in the first row, indicating no statistically significant effects, at conventional levels.


Table 3 from Dharmapala, Foley and Forbes.

Of course, spurring investment is not the only reason to implement tax measures. If the objective of government policy is to provide a boon to stock holders, at the expense of non-stock holding taxpayers (you know which income deciles those folks would be in), then this would appear to be an ideal policy measure.

Some other views on the subject: [Donald Marron], [CBPP], and [Tax Policy centre]

This post was published at Econbrowser.

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