Postcards from Old Europe – Homeland security Investment

A piece of legislation called the Homeland Investment Act is currently winding its way through the legislative process. The act is part of a series of measures which were set in motion to end retaliatory, WTO-sanctioned European tariffs on US exports. These tariffs were put in place because the WTO decided that certain US tax provisions, the FSC and its successor, the ETI, constituted illegal tax subsidies (In a nutshell: The FSC and the ETI allowed partial tax exemptions for income corporations earned from foreign sources).

The Homeland Investment act now proposes a huge tax break on foreign earnings which are brought into the US for reinvestment. The amount of money which could be moved is staggering

J.P. Morgan Chase estimated the amount of foreign earnings “stranded” overseas at $650 billion, roughly 6 percent of gross domestic product.

Without the tax break, a US company would have to pay 35% tax on repatriated earnings. The Homeland Investment act would slash this to around 5%.

Many analysts expect much money to rush back into the US thereby giving the economy another shot in the arm in the second half. Another group of analysts also expects that the process of repatriation will give a boost to the US dollar as foreign currency holdings are exchanged into the US currency.

My view of the situation is that the act will probably succeed in attracting offshore funds. I’m not so sure that investment will be boosted all that much – companies might choose to retire debt or use the cash to top up sagging pension plans. But the tax measure should prove popular and thereby provide the US Treasury with some income it would otherwise not have received.

I do not believe that the dollar will profit though. Any offshore entity will probably have cash in two currencies – one (smaller) part will be in local currency to fund local operations while the other (larger) part will consist of retained (parked) profits in USD.

In my opinion the Homeland Investment Act could provide some additional stimulus to the economy at a time where the recovery’s momentum is starting to moderate – just don’t expect the US currency to profit all that much.

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