Question

In: Finance

Consider what you know about global tax strategies and capital budgeting (NPV) analysis. The current U.S....

Consider what you know about global tax strategies and capital budgeting (NPV) analysis. The current U.S. marginal corporate tax rate is 35%. This has provided an incentive to U.S.-based firms to create profit (therefore jobs) outside the United States (in low tax regimes) and leave it outside the United States.

Many in Congress are currently advocating a one-time, repatriation tax of 5% in order to create jobs. (i.e. any profits held outside the United States may be returned to United States and taxed at only 5%, rather than 35%. This would be a one-time event, the underlying tax law and rates would not be changed). Would the repatriation tax be likely – or unlikely – to have the desired effect of creating jobs in United States. Why or why not?

Solutions

Expert Solution

Repatriation of foreign earnings to Unites States through taxing them at a marginal rate may sound like a good idea for economy as a whole but the story is exactly opposite. The desired benefit of employment generation is not achieved through this repatriation. The evidences clearly reflects that repatriated earnings does not lead to employment generation, domestic investment etc. rather the same is being used for the purpose of an increase in payouts to shareholders. As per estimates, Every $1 increase in repatriated earnings has resulted in $0.60 to $0.92 increase in dividends and payouts to shareholders. Therefore, it can be said that the decision of government to allow companies to repatriate earnings back to US at nominal rate has allowed business owners to convert the same into dividend earnings for themselves instead of investing back the same for helping economy in the longer run. Hence, it is unlikely that repatriated earnings will result in job creation in the economy.


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