Distinguished gold guru, Richard Russell, has asked for a currency trader’s opinion on the pending tax abatement legislation that has already passed the Senate and is now being considered by the House Ways and Means Committee.
This legislation would for one year significantly reduce the tax obligation on repatriated funds from US multinational companies. It would reduce from 34% to 5% the tax the US applies to repatriated earnings that have already been taxed by foreign governments. The amount of these funds has been estimated from a low of $135 billion to a high of $300 billion.
First, this issue is somewhat confusing because in most case the US has tax treaties with other countries by which the taxes paid in these countries is deductible from those due here upon repatriation.
That being said, I question the numbers given for non-repatriated funds by US multinationals that might be attracted by this new law. I would assume this law will apply to those US multinationals that pretend to have profit centers in places like the Grand Cayman Islands where they pay no taxes.
The other strange character of this legislation is that many countries in which multinationals deal have taxes equal to or higher than the US, and those taxes are deductible from taxes due in the USA. The arithmetic of this situation is intriguing. This legislation reminds me of the saying that this administration leaves no billionaire behind. Therefore, my comment to Mr. Russell on this legislation is as follows:
1/ I seriously doubt that the number of $135 billion to $300 billion is correct for those that will be attracted by this legislation to repatriate.
2/ The reason for being out of the United States in many cases is to be out of the US dollar and to avoid paying taxes. This money will not repatriate.
3/ The multinationals require their funds to operate so if they repatriate to take advantage of the tax loophole they will simply expatriate again to maintain their operations. That is a net zero effect on the value of the US dollar. What is bought via repatriation can be expatriated and therefore sold later – possibly even the next day.
4/ If we take the high figure of $300 and consider a 29% tax saving then that means a tax loss of 87 billion from potential future revenue and a higher US budget deficit in years ahead.
I read this as a non event - certainly in light of the size of the Forex market and potential dollar strength. I do, however, see its extreme importance to the US “FAT CATS.”
The following commentary is from the St. Louis Federal Reserve:
“Foreign exchange markets facilitate the trade of one foreign currency for another. Most exchanges are made in bank deposits and involve U.S. dollars. Over a trillion dollars in foreign exchange trades take place every day; foreign exchange dealers handle most transactions. Businesses, financial institutions, governments, investors, and individuals use the foreign exchange markets to adjust their currency holdings.
Factors Driving Exchange Rate Movements
A number of factors may influence foreign exchange rates, including the following cited by Rose (1994):
• Balance-of-payments position. A country experiencing a trade deficit usually faces downward pressure on its foreign exchange rate.
• Speculation over future currency values. Speculators buy or sell currencies when they see profitable opportunities.
• Domestic economic and political conditions. Deteriorating economic conditions and inflation typically have an adverse affect on foreign exchange rates.
• Central bank intervention. Central banks may buy or sell currencies to influence the value of their currency.”
References:
Cook, Timothy Q., and Robert K. LaRoche, editors. (1993) Instruments of the Money Market, Federal Reserve Bank of Richmond, Richmond, Virginia.
Federal Reserve Bank of New York. All About…the Foreign Exchange Market in the United States, July 23, 2001.
http://www.ny.frb.org/pihome/
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