Sorry, Jamie Dimon’s theory about how companies can boost the economy is wrong

Editor's note:

This article was originally posted on CNBC on March 15, 2017.

The way the U.S. taxes foreign income is one of the most criticized parts of the tax code, and it has come under increasing scrutiny in recent years as the global economy plays an ever-increasing role in the fate of the U.S. economy.

U.S. multinationals are taxed on their actively-earned foreign income on a deferred basis, only after the profits have been sent back to the U.S. parent corporation.

As a result, U.S. companies have built up about $2.5 trillion of assets that have not yet been repatriated. Some of the companies with the largest share of this total include Apple, Microsoft, Pfizer, and General Electric. Deferral is now the biggest corporate tax dodge, costing the government over $100 billion per year in lost revenue.

Now, some voices are arguing that if corporations could just repatriate more of their earnings, it would boost the U.S. economy. As JPMorgan Chase‘s CEO Jamie Dimon recently said, “It is a fuel to the system” and “That money that isn’t brought back is going to be reinvested in a foreign country, in a plant or acquisition, which has been happening, and never to return.”

But encouraging repatriation now would not stimulate the economy. Companies are already sitting on tremendous amounts (roughly $2 trillion) of cash domestically that they could use to invest or pay out to shareholders. No shortage of ready cash is preventing them from investing more or creating more jobs already. The firms with the largest stock of profit held overseas also tend to be the ones who already pay the most to their shareholders.

Another reason why increased repatriation would not help the economy is that the funds earned abroad don’t need to be repatriated to be used in the U.S. economy. A common misconception is that the funds literally are held overseas. But repatriation is not a geographic concept. By definition, repatriation refers to a subsidiary corporation sending the money to its parent corporation. This forces the parent to recognize the profits and pay taxes on them, after which it can pay out dividends to shareholders or buy back shares. In practice, much of the accumulated foreign profits are already held in domestic accounts from which banks can lend the funds to finance investment in the American economy.

There is no doubt that the economy could do better and the tax system could be upgraded. But lack of repatriations is not the problem, and tax cuts for such activities are not the solution.

It is only a short step away from claims like Dimon’s, especially after considering the priority of those in Congress and the administration to reform taxes, to argue that the U.S. should encourage more repatriation via tax cuts. But that would be a mistake.

Congress and President Bush enacted a repatriation tax holiday in 2004 and even required firms to create domestic jobs or make new domestic investments in order to get the tax break. Nevertheless, the firms, on average, used the tax break to repurchase shares or pay dividends — not to increase investment.

And a tax cut would drain future revenues and would encourage firms to expect regular repatriation holidays and thus to hold funds back from repatriation in the future. Indeed, the prior tax holiday was supposed to discourage firms from holding profits overseas. But instead, firms stockpiled new reserves, presumably in anticipation of another holiday.

So, it’s doubtful that an increased repatriation effort today would boost the economy or that a tax holiday for repatriated funds, like what was tried in 2004, would cause new problems.

There is no doubt that the economy could do better and the tax system could be upgraded. But lack of repatriations is not the problem, and tax cuts for such activities are not the solution.