In 2004, the US allowed companies to repatriate profits from oversears subsidiaries and pay a low 5.25% tax rate on those profits. Ultimately, US multinationals repatriated $362 billion. Since the US now faces a shortage of capital, doesn’t it make sense to do this again? We may have taken a step closer (via the WSJ):
The Internal Revenue Service significantly relaxed the rules governing how U.S. corporations can repatriate cash parked overseas, in yet another government move to ease the credit crisis.
The ruling, issued late Friday, allows companies to bring back money for months at a time without incurring the 35% corporate income tax they normally would owe.
The new rules will allow parent companies to borrow from foreign subsidiaries for as long as 60 days rather than the normal 30 without paying taxes. Why not just let them repatriate the profits tax free? One of the problems with all the alleged solutions to the credit crunch is that they are temporary. The US needs permanent capital and the TAF and all the other Fed lending programs are short term in nature.
A long term solution needs to address the lack of capital and the only way to do that is create an environment that is friendly to capital. The US has the second highest corporate tax rate in the world at 35% and our regulatory structure is complicated. If we want the world to send us capital we need to remove those impediments.