“Capital Goes Where It’s Welcome and Stays Where It’s well Treated” – Walter Wriston

This article was published by The McAlvany Intelligence Advisor on Friday, September 21, 2018:  

The quote most famously made by Walter B. Wriston, the former chairman and CEO of Citicorp and former chairman of Ronald Reagan’s Economic Policy Advisory Board, is the one quoted in the title. He passed away in 2005, long before Trump’s tax reform plan (and its tax holiday for foreign corporate earnings) proved it to be so by beginning to transform the U.S. economy. In the first six months of 2018, nearly half a trillion dollars have been repatriated by American companies holding profits overseas waiting for such a time as this. Taxed at just 15.5 percent instead of 35 percent, companies are now reclaiming their foreign capital and treating it with the respect it deserves, and the results are showing up everywhere.

Apple is already bringing the “vast majority” of its $250 billion in foreign cash (but only “over time” and not overnight). American technology giant Cisco has already brought back $70 billion, while Eli Lilly & Co. has repatriated $9 billion from overseas. United Technologies has moved more than $5 billion from its overseas accounts, while Walmart just announced plans to repatriate $5 billion in September alone to invest in its domestic operations.

Anti-capitalists claim that repatriation will only line the pockets of top executives and investors holding stocks, but the Federal Reserve reported that, of the $300 billion repatriated in the first quarter of the year, only $23 billion was invested in stock buybacks. The rest went into already approved capital projects that were just waiting for their funding.

One such anti-capitalist critic is Manuela Tobias who writes for Politifact, the allegedly fair and balanced fact-checking website. He took Trump to task – ready? – for overstating just how much was being held overseas! In July Trump said that untaxed corporate earnings held offshore used to be “$2.5 trillion … I guess it’s $5 trillion now. Whatever it is, it’s a lot more. So we have anywhere from four to five or even more trillions sitting offshore.”

Tobias at least admitted that no such hard number exists: “We’ll start off by saying there is no public estimate on untaxed earnings overseas.” So instead he looked at a line item often found on company balance sheets called “indefinitely reinvested earnings” and just assumed it represented those foreign untaxed earnings.

After quoting various sources, which were also making guesses, Tobias concluded that the highest guess was $2.8 trillion, but “that could be off by a couple hundred billion dollars….”

Whatever the number is, it’s a huge number (sorry), and a lot of it is returning to the United States where it is being invested rather than idling away in foreign banks.

Not all of it is coming home, simply because there are still places around the world where those funds can be more profitably invested. Some companies are finding that, even with the tax holiday, it’s still more prudent for them to raise additional capital through stock and bond offerings rather than pay that 15 percent haircut to the U.S. Treasury. Other companies are waiting for the IRS to finalize the rules under which such repatriations can be made. As Scott Levine, a tax partner at Jones Day LLP, noted, “Sometimes you just can’t move cash from point A to point B by just pushing a button. We [help our clients] find ways to get the cash home, but [we’re] always worried that there’s something [in the new tax law] that you didn’t read right.”

There’s another beneficiary that most aren’t mentioning: the U.S. Treasury. At 15.5 percent, the U.S. Treasury is enjoying – and will continue to enjoy – this continuing windfall, amounting to billions, that takes pressure off the U.S. taxpayer and reduces the demand on Treasury to issue new bonds to pay the government’s expenses. To date, that windfall has generated over $70 billion in new revenues, and more will be coming into the Treasury as companies make business decisions on where best to invest their capital.

Acting as rocket fuel, repatriated funds are having an “afterburner” effect on the U.S. economy, which effect is likely to last for years to come. Wriston was right: capital goes where it’s welcome and stays where it’s well treated.

Sources:

Background on Walter Wriston

The Wall Street Journal: Profit Repatriation Slows in the Second Quarter After Tax Overhaul

Marketwatch.com: Repatriated profits total $465 billion after Trump tax cuts – leaving $2.5 trillion overseas

The Wall Street Journal: U.S. Current-Account Deficit Narrowed in Second Quarter

Politifact.com: Are there over $4 trillion of untaxed corporate earnings offshore, as Donald Trump said?

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