Econometrically Assessing the President’s Tax Plan

Well, we don’t know for certain what he’s going to announce (and maybe even he doesn’t know what he will) — but according to Bloomberg

President Donald Trump plans to propose a 10 percent tax on more than $2.6 trillion in earnings that U.S. companies have stockpiled offshore, said a White House official familiar with the president’s tax plans.

Proceeds from the so-called “repatriation tax” would represent a one-time source of sorely needed revenue, which could offset some of the deep tax cuts Trump has proposed for businesses — or could be devoted toward popular, bipartisan initiatives, like infrastructure spending.

…Economists say that removing the tax-related disincentive to repatriation would stimulate the U.S. economy by encouraging domestic investment — though it’s also possible that much of the cash would be plowed into stock buy-backs or shareholder dividends.

Gee, I wonder if the tax holiday is likely to spur private investment, higher employment. Or will this just be a gift to stock owners? Somebody should investigate this question, using formal statistical techniques, given the potential cost to taxpayers.

Oh, somebody has. From Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, by Dhammika Dharmapala, C. Fritz Foley, Kristin J. Forbes.

This paper analyzes the impact on firm behavior 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.

Ungated version here. If one is wondering if the econometric analyzis was up to snuff, note that the paper was published in The Journal of Finance.

In other words, the main beneficiaries of this plan would, at first glance, appear to be owners of equities.

14 thoughts on “Econometrically Assessing the President’s Tax Plan

  1. Tom

    Where’s the beef? A good chunk of American households either own stock directly or participate in their employers’ 401K and related plans. Other Americans have pensions that invest in equities, and a rise in share prices will help bolster pension finances. Moreover, there is a financial asset wealth effect. As stock-holding households increase spending in response to higher financial wealth, that will further stimulate the economy.

    Would you rather the companies not repatriate their earnings and leave them overseas?

    1. Ian

      I think you’re missing the point of Menzie’s post. A strategy like this is likely to not have the impact that the Administration is planning for. Especially for those without employer pension plans or who don’t own equities. There’s another “good chunk of American households” who don’t have either.

    2. tagyoureit

      “The participation rate for employer-sponsored retirement benefits, which include defined benefit and
      defined contribution plans, was 54 percent for civilian workers. The participation rate was 49 percent for
      private industry workers and 81 percent for state and local government workers.”

  2. Manfred

    “In other words, the main beneficiaries of this plan would, at first glance, appear to be owners of equities.”
    Dunno, is this statement written as if being an “owner of equities” is a bad thing? Is it a stigma?
    If I am an owner of equities, should I commit harakiri? Am I a bad boy? So, if I am an owner of a 403(b) account composed of equities with TIAA , I am a bad guy?
    More seriously, who are the owners of equities? My problem with the post is that the last statement is thrown in without any analysis.

    1. Abe

      Menzie was pointing out that a major economic rationale for the tax holiday (“…that removing the tax-related disincentive to repatriation would stimulate the U.S. economy by encouraging domestic investment…) has not been the case. Just that the repatriations have gone mainly to owners of equity and as far as equity ownership
      1. As of 2013, the top 1 percent of households by wealth owned nearly 38 percent of all stock shares, according to research by New York University economist Edward Wolff ( and nearly all of the stock ownership in the U.S. is concentrated among the richest. According to Wolff’s data, the top 20 percent of Americans owned 92 percent of the stocks in 2013.
      2. The marginal propensity to consume is lower, for the most part, among wealthier households then less wealthy households ( so that no this is not a particulary economically effective way to provide a tax break.
      3. There are a number of ways which provide a path to repatriating overseas profits (see without favoring one sector of the economy over another, generating more revenue and not potentially increasing the federal government.

      So no, people who own equity are not bad people, just that the idea is bad.

    2. Menzie Chinn Post author

      Manfred: From SecTreas Mnuchin:

      “What this is about is creating jobs and creating economic growth,” Mnuchin said at the White House. “And that’s why massive tax cuts and massive tax reform and simplifying the system is what we’re going to do.”

      And the repatriation aspect of the plan fails to do that.

  3. joseph

    Tom: “Would you rather the companies not repatriate their earnings and leave them overseas?”

    Companies are holding their earnings overseas hostage until a Republican Congress and president can give them some corporate welfare.

    Here’s an alternative for you. Instead of corporations waiting for a tax holiday how about a tax penalty? For every year companies hold profits overseas, their tax rate for repatriation increases by 5%.

    It’s the notion that corporations can just wait for lower taxes from a Republican administration that encourages them to delay repatriation. Remove that incentive permanently and they will gladly repatriate. Shareholders will demand repatriation before losing everything. Or else share price will decrease based on guaranteed loss of dividends.

  4. Craig

    So what happened to the money after it was distributed to the stock holders? Did they mostly spend it, loan it, invest in another business? All that would seem to stimulate the economy unless it was sent straight back overseas for investment in a foreign company. I have no idea of the impact of this indirect stimulus, but to end the analysis at the first transaction in the US (distribution to stock holders) seems premature.

    1. chicken_or_egg

      If my recollection serves me, and it might not, research after the last holiday showed the money passed as a special dividend/bonus.

      There was no measurable economic activity change among the sweepstakes winners. No measurable change to aggregate economic activity.

  5. Erik Poole

    Good post Abe.

    This proposed tax holiday fits the narrative of Trump campaigning to those of modest income levels but benefiting the materially comfortable once in office. I could use some colourful, graphic language to describe this ‘narrative’ but I doubt Prof. Chinn would appreciate it.

    The other alternative? Lower US corporate income tax across the board, institute a value-added sales tax and hike excise taxes on gasoline and diesel.

  6. Steven Kopits

    I agree with the notion that US corporations do not seem to be capital constrained. After all, the capital can be repatriated for investment purposes by a loan from the subsidiary to the parent. Therefore, it’s not clear that repatriation would have any meaningful impact on the investment side.

    On the other hand, it puts more purchasing power in the hands of dividend recipients. At full employment (are we at full employment?), the increment should largely be directed to imports, or perhaps share prices or interest rates with some minimal effect.

    The primary beneficiary, it would seem, is actually the US Treasury, which receives some revenues when in fact it would have received none.

    1. Alan Goldhammer

      “The primary beneficiary, it would seem, is actually the US Treasury, which receives some revenues when in fact it would have received none.”

      Let’s also not forget that the Treasury will receive additional money as the new increased dividends are paid out and/or the shareholders sell the appreciated equities (resulting from the large stock buybacks that are destined to happen) realizing taxable gains. I agree with Menzie that this is not particularly good policy but as a retiree who is managing a substantial equity portfolio it is probably a net plus for me.

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