Opinion: USA shouldn't create a repatriation tax holiday

The Obama administration has been looking into waiving the rapatriation tax on foreign income. The thinking is that this would lead to investment within the country and lead to job creation. For those not familiar, many US corporations are sitting on huge cash balances but a lot of that money is overseas (earned from their foreign operations). If they bring that back into the country, they would pay a repatriation tax. Many executives of multinational firms have been pushing the US government to waive the taxes. Most readers, that own shares in these firms, would benefit from such a tax holiday.

I am not American so take it for what it's worth but I believe the US government shouldn't waive the tax.


Buffett not Supportive of Obama's Policy

In an interview with CNN Money, Warren Buffett shares his opinion on why the tax shouldn't be waived (Thanks to Jacob Wolinksy for bringing this video to my attention).

Buffet's main argument is that waiving the tax will make investors and managers of these firms feel that the government will waive the tax again in the future (i.e. what's the point of having the tax if everyone assumes it will be waived over and over again?). Note that the Bush administration waived this tax already so there is reason to believe that market participants may start assuming that this is a common behaviour of the US government.

Buffett argues that, if everyone starts assuming that the tax will be periodically waived in the future, it will actually lead to more investment overseas (since tax rates are lower overseas, firms will prefer to invest overseas). Needless to say, this completely contradicts the purpose of waiving the tax in the first place.

In addition, I am doubtful of the benefits being suggested by the tax-holiday advocates. When the Bush administration waived the tax, most of the money that flowed into the country simply went to share buybacks and dividends and it was questionable how much productive domestic investment actually occurred.

Dubious Investments?

Furthermore, my hypothesis, which long time readers of this blog may have heard before, is that most of the money that flowed into the country was recycled into the real estate. In other words, instead of ending up in productive investment in the country, most of the money appears to have flowed into a dubious overvalued asset: real estate. On top of the numerous serious mistakes made by the Bush administration, this is arguably one of the worst. Hundreads of billions were likely wasted on the real estate bubble.

There is nothing to suggest that the same thing that befelled the Bush administration won't happen to the Obama administration. That is, I don't have any confidence that anything that flows into USA will be invested in productive assets. As Buffett alludes to, most credit-worthy companies have no problem raising capital and all this excess capital can end up with another bubbly misallocation exercise. For instance, I'm in the minority but I believe the stock market may be somewhat overvalued and it wouldn't surprise me if most of the capital that is repatriated ends up being used to buy back shares at overvalued prices — resulting in another few hundread billion wasted.

To sum up, if you are not permanently lowering the corporate tax rate, it makes little sense to provide tax holidays to corporations. I thought the Bush administration clearly showed how waiving taxes can have adverse results and it's too bad the Obama administration doesn't seem to have learned anything from the recent past.