Do repatriated profits boost economic growth?

by on September 19, 2017 at 2:34 pm in Economics | Permalink

Not really.  Here is John Cochrane:

The Irish bank [holding Apple profits] can lend the money anywhere. It can buy US mortgage backed securities, it can lend the money wholesale to US banks who lend it out to US businesses. It can even lend the money to Apple US. If Apple or any other US company wants to invest, they can borrow from the Irish bank. Conversely, if profits are repatriated to US banks, those banks can lend the money overseas.

Here is the full story.

Addendum: There are some very good points in the comments.

1 spencer September 19, 2017 at 2:40 pm

The important story is that given the record high profits in the US, American firms are not constrained by finances to investment more than they do. As a whole, US firms have sufficient profits and/or retained earnings to investment much more than they are investing currently.

Under these circumstances a corporate tax cut is unlikely to significantly boost investments.

2 mulp September 19, 2017 at 3:04 pm

Milton Friedman argued for cutting tax rates and eliminating tax dodges circa 1970 to REDUCE investment.

He argued that the over 50% tax on money NOT paid to workers made it too easy to pay workers more and more because this increase in labor costs was financed heavily by the IRS.

If shareholders and stock analysts wanted higher revenue growth, throw more workers at production and selling to grow, cutting prices if needed, to increase total revenue by any means. If an added dollar in wages generated only 80 cents in revenue, it was a win because that was 50 cents in revenue buying 80 cents in production and sales – the IRS paid 50 cents toward the 80 cent increase in revenue. Ie, for every 80 cent increase in revenue, profits fell by a dollar before taxes, but only 50 cents after taxes.

For Jeff Bezos and Elon Musk, the taxes of the 60s would not be a problem because the accelerated depreciation and immediate expensing of investment would have made it even easier to produce tax returns showing zero profits which would mean zero taxes due.

Friedman blamed the high tax rates for too high labor costs which in turn led to too much consumption driven demand which drove inflation.

He argued for lower rates and fewer exemptions to cut labor costs, thus cutting demand, thus ending inflation.

That is what the rest of the world has done.

The rate is about 15% with the base expanded by eliminating the deductions for labor costs.

The US is out of step by using a 35% tax rate with the tax dodge of deducting labor costs from the tax basis.

3 spencer September 19, 2017 at 3:47 pm

Labor’s share of non-farm business output is at near record lows almost ten percentage points below were it was in 1961.

4 Iskander September 19, 2017 at 11:07 pm

Friedman blaming taxes for inflation? Maybe we should introduce him to the work of some of those monetarist fellas.

5 rayward September 19, 2017 at 2:41 pm

Of course, it’s a myth that profits generated by foreign affiliates of US companies are stuck overseas, a myth that serves to support a tax cut supposedly intended to bring those profits home.

6 BrianK September 19, 2017 at 3:03 pm

So props to Cochrane, who (credibly) says he favors the tax cut, for going out of his way (he has tons of other topics to write about) to criticize one of the principal arguments made by other supporters of the tax cut.

7 rayward September 19, 2017 at 3:05 pm

Is that the Straussian reading of it?

8 mulp September 19, 2017 at 3:10 pm

Yep, the excessively high inflation for the past 8 years has not been high enough!

By bringing back the cash, real estate prices in urban areas can inflate to five times the levels that millennials can afford from a mere three times what they can afford.

Note, wasteful spending by government on building something like Hyperloop from where jobs are to rural empty land, and installing water and sewer for empty farm land would destroy wealth. Such wasteful spending would provide competition to real estate in the urban core which would drive down real estate prices and thus destroy wealth.

9 Mark Brophy September 19, 2017 at 4:17 pm

If it’s a myth that profits are stuck overseas then why is Apple borrowing tens of billions of dollars even though they’re loaded with cash? If Apple Ireland could lend to Apple Cupertino without being taxed, as the article claims, that’s what Apple would do rather than issue bonds and pay interest.

10 gab September 19, 2017 at 6:30 pm

Just off the top of my head, maybe Apple can borrow for longer tenors in the corporate bond market?

11 JosieB September 19, 2017 at 9:45 pm


12 Vivian Darkbloom September 19, 2017 at 8:13 pm

The blog post says that Apple Cupertino can borrow from an Irish bank in which Apple Ireland has a deposit– not from the latter directly. But, so can you or I.

13 A clockwork orange September 19, 2017 at 11:18 pm

Between September 1977 and September 1980 yearly sales grew from $775,000 to $118m, an average annual growth rate of 533%.

ruleso f attraction, the first film cut by final cut pro, made 11,819, 244 at the box office. The longitude of Skagway is -135.305 and 464 square miles

24p well 24 times pi = 75.39
232 miles, 23.976
April 1976

14 A clockwork orange September 19, 2017 at 10:25 pm

Go to the bank where I’ve been depositing hundred and sixty dollars twelve months a year for twelve years. That’s 23, 040 dollars. You square it, to reverse the pi curfew on circumfrance and radius, and the obverse of the doubt is 530,841,600 dollars.

The fjords lead to skerries. in Skagway, the latitude is 59.5 degrees north. The speed of sound of chromium at 20 degrees Celsius is 5940 m/s. 23.35 is afterall the molar capacity of chromium.

You just can’t stand the prosperity of an easy job. Sit more. See the sacque was a dress with a hoop square on the bottom to hide illicit pregnancies ibid mary louise. Ophelia died of Pious Vertigo. I’m dying of Hazel’s BO. To-to. To-to is a band. The American Ship Company in Loraine Toledo spells tornado. It was always going to be the hemlock.

15 Ricardo September 20, 2017 at 10:56 am

The fact that Apple (US) is borrowing money — presumably to finance investment, R&D or new product development — while its subsidiaries are flush with cash proves Cochrane’s point. A U.S. corporation that wants to invest is already free to do so by raising money from outside investors. Allowing them to bring back hordes of cash stuffed in overseas subsidiaries tax-free would simply eliminate the cost of debt service but the effect on investment would be marginal.

16 Tim Worstall September 19, 2017 at 3:04 pm

Sheesh, it’s not even an Irish bank holding those offshore profits. Apple, I think, goes to Bermuda, and then a subsidiary of the Bermuda company is in Nevada (?) which then invests the money. I like Cochrane but he’s missed a bit here.

17 Ray Lopez September 19, 2017 at 9:01 pm

+1 – here is the post I left with Cochrane, if he allows it past the moderation screen:

The argument over repatriation of profits was never about lending but taxation: the US government wants to tax profits that are sheltered in Ireland. The Celtic Tiger got that way from, in part, having high-paying white collar jobs to shelter US corp tax profits and in US corp subs paying the Irish government tax on those profits.

18 Vivian Darkbloom September 19, 2017 at 3:18 pm

“The Irish bank can lend the money anywhere…”

I don’t see this as a big deal. Apple or any other US business can borrow money just about anywhere without paying any US witholding tax on interest paid on that borrowed money. If Apple Ireland has a deposit at that same bank, the loan needs to be at arm’s length or Apple US would risk an income inclusion under Section 956 IRC (the same as if Apple Ireland had made the loan directly as an “investment in U S property”. In this respect Samsung Korea has about as much access to that liquidity as does Apple Inc.

19 Go Kings Go! September 19, 2017 at 3:39 pm

That Irish bank is paying Apple Ireland crap for its deposit and charging Apple US something more than crap to borrow. Plus an army of professionals are required for financing, tax, accounting, bank (FATCA, CRS) and other cross-border compliance frictions.

20 Vivian Darkbloom September 19, 2017 at 3:46 pm

I guess in the world of ecomic theory, having the ability to freely allocate one’s own capital has no importance for “ecomic growth”. More specifically, whenever I read something written by an economist on US tax, I feel the same as when someone theorizes about the game of baseball when they have no idea what the rules are, much less any experience playing the game.

21 Go Kings Go! September 19, 2017 at 4:34 pm

Agree 100%. It’s a useful proxy: I can’t evaluate Professor X by the standards of his field, but adjust my confidence level when he wanders into mine. I mainly judge his mix of confidence and subject-matter grasp. “It’s what you learn after you know everything that counts”, Earl Weaver.

Sports chit-chat is a great neutral ground for measuring personalities and cognitive strategies.

22 CG September 19, 2017 at 3:21 pm

Still skeptical. While possible for these banks to make these cross-border loans back to the US, in practice banks tend to lend money domestically first and foremost as that’s where their customer networks are, where their collateral is going to be located, where they minimize currency exchange risk, among other reasons. The rule also leads to a distortion where capital is not allocated to highest valued use, as may have been more efficiently used by the company willing to take a bigger risk with a direct investment in the business rather than the bank making a conservative loan while sitting on a large pile of deposits.

23 Jeff R September 19, 2017 at 8:42 pm


Also, if US banks do borrow the money, isn’t there an extra middleman involved, then, before it reaches its end user? An extra level of under-writing involved, an extra level of securitization, and thus some deadweight loss? Maybe that’s immaterial in the grand scheme of things, but I wouldn’t assume so, the way commercial bankers get paid.

24 spencer September 19, 2017 at 3:50 pm

At least it use to be that if a US multinational wanted to invest in a foreign country they would borrow in that country so that it had both liabilities an assets in the same currency so currency swings would not impact their balance sheet.

25 The Other Jim September 19, 2017 at 3:53 pm


Old Dem Take (Obama era): “Evil US corporations are stashing money overseas!”

New Dem Take (Trump era): “Don’t let Trump gloat about bringing that money into the USA. It won’t actually help anything!”

Thanks for bringing us whatever take fits the Dem narrative, right then and there, Ty.

26 Bill September 19, 2017 at 5:29 pm

What if Tyler, contrary to your belief, were telling the truth. But, you don’t have to take his word; there have been numerous studies on this subject.

Perhaps we should challenge you to produce or reference a report to support your position. Dare you.

27 Potato September 19, 2017 at 5:58 pm

I think both of you are nuts.

Bringing tax money in will not increase GDP growth. That’s obvious. But both of your ideas of truth are dependent on who is speaking. So you’re both wrong. And have a worldview so insane and inconsistent that you should be labeled incompetent.

I’d love a polygraph for voting rights. Do you believe X if your side says it? Do you believe X if the other side says it ?

28 Bill September 19, 2017 at 7:11 pm

Potato, Please do some research regarding the last tax holiday and foreign repatriation experiment.

29 Jeff R September 19, 2017 at 8:44 pm

John Cochrane isn’t exactly in the habit of helping craft narratives for the left.

30 Anonymous September 19, 2017 at 4:59 pm

Why always assume perfect, frictionless allocation of capital? The analysis can’t be that much harder without it. You can’t borrow at the same rate you get on your deposits, and in fact the gap is quite large, so wouldn’t there be improved opportunities for investment with repatriation?

31 Fallacy September 19, 2017 at 5:07 pm

Apple can indeed borrow overseas because it is a multinational corporation. The middle market widget maker with revenues of $200 million is not able to borrow overseas, or in this case, borrow in Ireland.Brining the excess cash that is stashed overseas would provide liquidity to American banks and American businesses, where it can be invested in the local economy. The era of free money from the Fed is ending and banks’ balance sheets are getting tighter with the Fed winding down its balance sheet.

Also, the reason Apple and other firms elect to borrow and incur interest expense is because it is cheaper than repatriating the profits from overseas. For example: Apple can borrow $1,000 at a rate of 5% for $50 in interest expense and produce $255 in profit ($300 income before 15% tax). Or, repatriate $300 back to the U.S. and be taxed at, say 30%, and have only $210 in profit. Pretty simple decision for a corporation looking to allocate cash efficiently.

32 Bill September 19, 2017 at 5:28 pm

I’ve been fooled and I want my money back.

Remember during the Bush administration how a repatriation program was supposed to create jobs. Research showed it didn’t.

But, we’ll do it again. Or so I hope, as I am probably overweighted in multinationals. You should always bet on the stupidity of the American voter when it comes to their understanding of corporate taxes.

OECD countries are getting restless, and some of the tax games will likely be challenged in the future. The Financial Times reported recently that a number of multinationals have been setting aside money to deal with future tax disputes.

33 Per Kurowski September 19, 2017 at 6:32 pm

Worse… those “cash” assets have already been deployed

34 Tom T. September 19, 2017 at 8:45 pm

Setting aside what the Irish bank *can* do with Apple’s money, what *does* it actually do with it?

35 zeke5123 September 19, 2017 at 9:41 pm

Cochrane misses a key point.

Someone mentions above that if Apple Ireland loans the money up to US, there would be an inclusion in the US roughly equal to the amount of the loan under Section 956. This inclusion would equal the same amount as if Apple Ireland loans the money.

Further, Apple US cannot borrow from a third party borrower on the basis of the cash in Apple Ireland. A guarantee of Apple US debt by Apple Ireland or a pledge of more than 2/3s of Apple Ireland stock would also be treated as a Section 956 investment.

So, there really is a limit to where or how Apple US can deploy the cash in Apple Ireland without incurring a tax. If there wasn’t, companies wouldn’t try to invert and there would be no need for Section 7874. The reasons why companies invert is (a) to base erode the US corporate tax base with intracompany debt and (b) to be able to access so-called CFC earnings. Recently issued regulations under Section 385 limit the ability to base erode the US corporate tax base. Yet companies still try to invert precisely because of the ability to access CFC earnings.

Either corporations are being irrational or there is a benefit; I would hope Cochrane would assume the latter.

36 Careless September 20, 2017 at 12:26 am

Further, Apple US cannot borrow from a third party borrower on the basis of the cash in Apple Ireland.


37 Vivian Darkbloom September 20, 2017 at 5:37 am

The joke’s on you 🙂 See IRC Section 956 (d). :

38 zeke5123 September 20, 2017 at 12:29 pm

third party lender, not borrower. Apologies for the typo.

But yes, Apple US could borrow from a third party lender on the basis of the cash in Apple Ireland, but in doing so would suffer the same tax as-if Apple US repatriated that cash as a dividend from Apple Ireland.

Look, big MNC would not be trying to invert if there was no benefit. I like Cochrane, but he gets this one wrong.

39 Jpe September 19, 2017 at 9:44 pm

It can’t lend to Apple US except on an extremely short term basis that can’t serve as investment capital.

The argument for lower rates on repatriation is that the funds can’t come to the US for investment in the business without the tax. Any US use has to beat the alternative use by a wide margin to overcome the tax hurdle.

40 jorod September 19, 2017 at 11:37 pm

That’s money that could be reinvested or paid out to shareholders.

41 Sandia September 20, 2017 at 7:02 am

Didn’t the author of this blog once say that it was very difficult to run a political economy that was perceived to be unfair?

Also, this and the Buffet post reminds us again that economists are **terrible** at writing about finance. Sorry, guys, Finance as practiced is about the details, the weeds, and the very smart and highly incentivized people who exploit their knowledge of those weeds.

42 John September 25, 2017 at 3:44 am

The money in apple Ireland is in the US already. Its kept in banks in Manhattan. The New York Times has reported on this several times. It is also in the year end reports for Apple Sales International. The money is available to secure debt for Apple, ASI etc from American banks. The term overseas in US Tax Code generally and specifically in Apples case is an accounting fiction. I believe it is what is commonly called a tick box exercise.

Cocherane starts his post of by saying this is an accounting truth but seems to imply at the end that the money is physically abroad while it is only legally overseas.

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