Donald Trump gave his tax plan yesterday. I am not going to make this a political commentary, I just want to focus on one aspect of Trump's plan -- and that is corporate profit repatriation. This has been talked about a lot: the idea that American companies that earn profits from their business activities and investments overseas ought to "bring home," or repatriate, that money.
Even Carl Icahn has jumped on this bandwagon, saying that there's something like $2.5 trillion of profits "abroad" and it ought to be encouraged to "come home," where it can be used for investment into domestic production so that jobs can be created or stimulated, or what have you.
Let's break this down, because there's a lot of misinformation in this very popular meme.
First, if an American business earns money by selling its products and services in Germany, China or, Brazil, let's say, they are earning euros, yuan and Brazilian real. You cannot "bring this home" for the simple reason that these currencies can only reside on deposit at their respective central banks. That means euros only exist on the books of the ECB (and other European central banks), and the same with yuan and real. The yuan exists on the books of the Bank of China and Brazilian real exist on the books of the Bank of Brazil.
I am not talking about physical cash and coins, but that is always a tiny component of the trillions on deposit. Surely, companies would not be transporting back giant vaults of foreign cash and coins and even if they did bring back shiploads of euro, yuan and real, once they got that hoard here and deposited it in their bank accounts, their bank would send that to the Fed and receive a dollar credit based on the going exchange rate (in the bank's favor, of course) and then the Fed would send all that paper currency and coin back to the respective central bank and get a credit in the Fed's account at that central bank, again, at some rate of exchange.
What I am saying is that the money does not physically come here. It can't.
So the question is, do Donald Trump and Carl Icahn really just want American companies to convert their foreign earnings into dollars? This way those dollars would automatically appear on the books at the Fed and simultaneously in their bank accounts. The money would be "here."
If so, it seems that they are forgetting that a foreign subsidiary of an American company ostensibly needs the local currency to operate in that country. It needs to pay workers, suppliers, purchase equipment, pay rent or other costs. A proposal to "bring back" profits means nothing more than doing an exchange rate transaction -- converting foreign currency deposits into dollar deposits -- and for what purpose?
At the end of the day there is only one true way to "bring back" those profits, and that is for the entire production of these companies to be done here in the United States. I'm sure Trump would love this and it could be done, but it would require that American citizens as a whole have enough income and purchasing power to buy all of what American industry can produce. The sole reason for the offshoring of production in the first place was because demand in the United States was insufficient to consume all our national output -- and that's because over the past 40 years, wages for most people (not those at the top) have stagnated.
So if Donald Trump or Icahn, or anyone else, wants to get companies to bring their profits home, they must first create an economy where the profits don't leave in the first place. That means creating sufficient income for the vast majority so that they can buy the total output of what America can produce. It's a great idea, and that's how it should be stated.