WASHINGTON, April 29 (UPI) -- America's economy needs a boost. The president's economic stimulus package -- his latest proposal for tax cuts -- aims to give it just that. There are plenty of arguments against the package, however, such as the contention that it is not fiscally responsible. But there is another proposal out there that would provide a bigger boost for the economy than the president's package and enjoys bipartisan support in both the House and Senate.
The Senate's Invest in the USA Act and its House equivalent, the Homeland Investment Act, aim to iron out a quirk of U.S. tax policy that keeps billions of dollars earned by U.S. firms overseas. U.S. tax law is essentially encouraging investment elsewhere when the U.S. economy desperately needs it here.
The problem is the U.S. tax code says that, when a U.S. company owns a foreign subsidiary which then pays back its earnings to the parent in the form of a dividend, those earnings are taxed at a mammoth rate of 35 percent. Unsurprisingly, most companies don't want to see such a large proportion of their earnings disappear into Washington, D.C. So they leave the money overseas, investing it where it can do more work for them.
The United States is unusual in this demand. Many other countries recognize the benefits for their economies of bringing foreign earnings back to the home country, so they do not tax those dividends in the way the U.S. does. The two proposed acts would rectify this anomaly by taxing dividends for one year at a much reduced rate of 5.25 percent, although there would be some offsetting costs in the way credits for foreign taxes already paid are treated. This would allow a backlog of unpaid dividends to flood into the U.S. economy.
And it would be a flood. The Joint Committee on Taxation has estimated that this sort of proposal would allow $135 billion of foreign earnings to enter the U.S. economy in the year following enactment. At a time when the economy is crying out for investment, this would stimulate firms to invest in capital equipment or research and development, make up the shortfall in pension funds caused by the decline in the stock market, or reduce their debt loads, making the companies healthier and more attractive to investors.
We can put that into perspective by comparing it to the estimated effect of the president's package, which Congress estimates would produce $114 billion worth of economic stimulus. So the homeland investment proposal would provide even more impact than the contentious package proposed by the president.
This is precisely why the proposal has bipartisan support. The Invest in the USA Act was introduced to the Senate jointly by Sens. Barbara Boxer, D–Calif., and John Ensign, R-Nev. It has the support of Sens. Evan Bayh, D–Ind., George Allen, R–Va., Michael Enzi, R–Wyo., and Gordon Smith, R–Ore. The Senate bill requires that the funds must be invested in an approved investment plan, so guaranteeing that the extra income will be used to stimulate the economy rather than just allowing the profits to be passed on to shareholders. Boxer said the proposal would "constitute a true economic stimulus by encouraging investment and job creation right away in such activities as worker hiring and training, research and development, and new plants. ... It will result in job creation rather than deficit creation by enabling a tremendous amount of investment in our economy in the short term with only a small cost in the long term."
With such strong bipartisan support and with the prospect of such a great benefit to the U.S. economy resulting from it, it is hard to see why the proposal has not yet attracted the support of senior senators on the finance committee, such as Chairman Chuck Grassley, R–Iowa, or ranking member Max Baucus, D–Mont. They may be worried by the potential cost of the proposal to the U.S. Treasury. The Joint Committee on Taxation has concluded that, over 10 years, the change would reduce net tax revenues by about $4 billion. However, in the first year it would increase taxation revenues by about the same amount. The cost over ten years must also be weighed against the tremendous benefits that $135 billion worth of extra investment would bring to the economy. Failure to support the proposal on the basis of such a small cost to the Treasury would in itself be fiscally irresponsible.
U.S. firms with international interests have for too long been forced to invest overseas when they would like to invest here. American ingenuity, enterprise and know-how have earned them billions of dollars that should be used to help America rather than remain locked up overseas. It's time to free them from their captivity and bring them home.
(Iain Murray is secretary of the Anglosphere Institute, an organization that encourages free trade between free economies.)