February 27, 2016

Will a MAC Discourage Repatriation of US Corporate Profits?

Some have suggested that imposing a MAC on all capital inflows would make it more difficult to get US corporations to repatriate profits held offshore. This is a non-issue for three reasons.

First, US corporations holding profits abroad rather than repatriating them are doing so to avoid corporate income taxes (CITs) of about 35 percent. Compared to this tax, a MAC charge averaging between zero and about 1.5%, depending on the size of the US current account deficit, would have no material impact. The issue is the 35% CIT rate, not a tiny MAC charge.

Furthermore, if Congress decided that this was an issue, the CIT rate could be reduced by the amount of the MAC. Doing so would assure that the MAC would have zero impact on capital repatriation while maintaining the very important principle that the MAC should be completely non-discriminatory.

Second, the US Government is not encouraging corporations to repatriate profits  because America is short of capital. The Government's motive is rather to collect taxes on such funds.

Third, if capital ever were to become relatively scarce, as indicated by elevated interest rates, this would also indicate that the inflow of foreign capital has dropped rather remarkably. Should this happen, the dollar would almost certainly move to a more competitive level. This in turn would reduce America's external deficit and the MAC rate would move to zero.

In conclusion, there is no reason to think that introducing a MAC would have any material impact on the repatriation of corporate profits currently held abroad.

America Needs a Competitive Dollar - Now!

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