Thinking through Trump’s profit repatriation idea

As you may know, US companies have something like $2T in cash sitting overseas because they don’t want to pay 35% corporate income tax to bring it back on-shore.

President Trump is apparently working on a proposal to allow companies to repatriate those profits at a much lower tax rate – something like 10-15%.

The argument in favor of this special tax amnesty is that the companies would reinvest the repatriated profits in the US, creating jobs.

But I don’t buy that argument at all, and here’s why:

  • We have been living in a 0% interest rate environment for years
  • When debt is so cheap, any project that appears likely to generate yield materially in excess of 0% gets a long look
  • So, it’s doubtful US companies have back-logs of exciting potential investment projects they haven’t funded for lack of access to capital

If companies are unlikely to reinvest the $2T when it comes back on shore, what can we expect companies to do with it?

The most likely answers are:

  1. Acquisitions. If you can’t see any opportunities to reinvest profitably in your own business to generate growth (see above), you might be tempted to use your excess cash to acquire other companies. Get ready for a waive of M&A.
  2. Dividends. This is the traditional manner in which companies return excess cash to investors. However, dividends are taxed, so not all investors love them.
  3. Share buy-backs. The current favorite for returning capital to investors. Buy-backs are tax efficient (at least for investors who choose not to sell their stock) and tend to raise share-prices (because, post buy-back, each outstanding share commands a larger portion of a company’s earnings).

So, if Trump succeeds in getting his repatriation tax holiday, I expect we’ll see rather less investment (eg job creation) and rather more M&A and share buy-backs.

This will be good (at least, in the short term) for stock market investors and i-bankers, but not really that helpful for workers.