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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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January 03, 2017


Following the Overseas Money

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Though the holiday season has come to a close, the forthcoming policy season may bring with it serious debate about a holiday of a different sort: a tax "holiday" that would allow corporations to repatriate accumulated profits currently held overseas.

As with many of the policy proposals that the new Congress and administration will consider, our primary interest here at the Atlanta Fed is to assess how the policy, if enacted, will likely affect our own economic forecasts and the environment in which future monetary policy will be made.

The best starting point is usually to just determine the facts as we know them. In this case, the question is what we know about the nature of the foreign earnings of U.S. corporations.

U.S. corporations' undistributed foreign earnings have been accumulating rapidly for more than a decade, as companies have expanded their foreign operations. The income earned by U.S. domestic corporations' foreign subsidiaries is generally not subject to U.S. tax until the income is distributed to the parent corporation in the United States. According to a November 25, 2016, Wall Street Journal article, over the past decade total undistributed foreign earnings of U.S. companies have risen from about $500 billion to more than $2.5 trillion, a sum equal to nearly 14 percent of U.S. gross domestic product.

Though it is not uncommon to refer to these sums as "a pile of cash," this sort of terminology is perhaps a bit misleading. For one, some of that "pile of cash" is not cash at all. According to a report from the Joint Committee on Taxation , "the undistributed earnings may include more than just cash holdings as corporations may have reinvested their earnings in their business operations, such as by building or improving a factory, by purchasing equipment, or by making expenditures on research and experimentation."

More important, the portion of foreign earnings that hasn't been invested in business operations is not necessarily "trapped" or "stashed" overseas. In fact, much of it is in the United States, already working (albeit while untaxed) for the U.S. economy.

U.S. companies do not routinely disclose what their foreign subsidiaries do with undistributed earnings. To better understand the situation, in 2011 the Senate Permanent Subcommittee on Investigations conducted a survey of 27 large U.S. multinationals. Survey results showed that those companies' foreign subsidiaries held nearly half of their earnings in U.S. dollars, including U.S. bank deposits and Treasury and corporate securities (see the table).

A couple of years later, a June 13, 2013, Wall Street Journal report also found that Google, EMC, and Microsoft kept more than three-quarters of their foreign subsidiaries' cash in U.S. dollars or dollar-denominated securities.

So it turns out, then, that a large fraction of undistributed foreign profits is held at U.S. banks or invested in U.S. securities. Even dollar deposits held by U.S. companies in tax havens such as Ireland, the Cayman Islands, and Singapore ultimately live here in the United States because foreign banks typically hold their dollar deposits in so-called correspondent banks in the United States.

In fact, U.S. dollar balances always stay in the United States, even if they are controlled from outside the country. Those dollars in turn are available to be lent out to U.S. businesses. And when U.S. companies' foreign subsidiaries invest their cash holdings in U.S. Treasury bonds, they are in effect lending to the U.S. government.

Foreign subsidiaries of U.S. companies choose to invest their profits in dollar-denominated assets for much the same reasons that make the U.S. dollar an international reserve currency:

  • the dollar maintains its value in terms of goods and services (the dollar is a global unit of account);
  • U.S. financial markets are deep and liquid, providing ample investment choices; and
  • U.S. government obligations are considered virtually risk-free, making them a safe haven during times of global stress and risk aversion.

Companies also have operational reasons for keeping surplus cash in U.S. dollars. Most of the international trade invoicing is done in dollars, so U.S. companies' foreign subsidiaries hold dollars to pay suppliers and deal with customers. Also, nonfinancial companies prefer to avoid foreign exchange risk and volatility. Finally, holding most of the funds, which are not invested in foreign operations, in dollars mitigates potential accounting losses, since U.S. companies are required to report in dollars on their consolidated financial statements.

None of this is to say that a tax holiday for U.S. corporations on undistributed foreign profits is a good or bad policy choice. But even without passing judgment, it may fall to macroeconomic forecasters to estimate the policy impact on business investment, job growth, and the like. Understanding the facts underlying the targeted funds is a reasonable starting point for answering the harder questions that may come.

January 3, 2017 in Fiscal Policy | Permalink

Comments

The extent to which foreign correspondent banks actually lend their balances is an important issue. Since these banks can leave them on deposit at the Fed, earning the IOER, there is an incentive not to lend. In addition, these reserves help foreign banks satisfy capital requirements, increasing this incentive. If these deposits switch to US domiciled banks because of a tax holiday, this could have a positive impact.

Posted by: Douglas Lee | January 04, 2017 at 09:47 AM

Are these ~$2 trillion dollars already part of the excess bank reserves or will they be added to the reserves?

If the roughly $2 trillion are already part of the excess bank reserves then the disequilibrium of bank reserves will be solved as the capital will be put to work and the Fed will not have to pay 0.75% on excess bank reserves to raise interest rates but rather demand for capital will raise interest rates naturally.

However, if the roughly $2 trillion are added to the already $2 trillion in excess bank reserves then $4 trillion in excess bank reserves will be expensive for the Fed which will need to pay $30 billion a year in interest on excess bank reserves at 0.75%.

Either way the repatriation will affect monetary policy.

Posted by: Peter del Rio | January 09, 2017 at 09:47 PM

Hi - with the greatest respect, surely the premise behind this post is incorrect. When US$s are held overseas, they are held in the Eurodollar or offshore banking system. This system will typically then lend in US$s to trade finance, commodity finance and EM. None of it is held in the US banking system, and it doesn't contribute to US money supply. If the Trump administration induces a repatriation of these deposits to the US, there will be a reduction in deposits in the Eurodollar banking system, which will be deflationary for EM, trade & commodities. At the same time there will be an increase in deposits within the US onshore banking system, which will boost money supply and potentially induce increased lending, reflating the economy.

Posted by: Julien Garran | January 24, 2017 at 06:45 AM

I am wondering if you have read or might comment on the recent paper from the FSB which addresses the decline in correspondent banking and how it might affect the practices outlined above?

http://www.fsb.org/2016/12/fsb-action-plan-to-assess-and-address-the-decline-in-correspondent-banking/

Posted by: Mark C | January 26, 2017 at 07:05 AM

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