Repatriating offshore profits

One of the reasons banks are less aggressive in lending to the private sector in a recession is that government regulators are more likely to “criticize” risky loans to that sector. Banks with criticized loans are forced to write-down these loans and consequently have less money available to lend.

There are more criticized loans in a recession, so banks have to rebuild their capital by reducing lending and lending only to the safest borrowers. Therefore, in a recession, government bank regulators force banks to be more conservative in their lending to the private sector, which leads the banks to buy more government bonds.

In my more cynical moments, I wonder if the economic geniuses in the Treasury Department, bank regulatory agencies and the Federal Reserve understand that they can force the banks to fund a larger portion of the huge federal deficit with cheap money by criticizing more bank loans to the private sector and crowding out private lending.

One of the reasons banks are less aggressive in lending to the private sector in a recession is that government regulators are more likely to “criticize” risky loans to that sector. Banks with criticized loans are forced to write-down these loans and consequently have less money available to lend.

There are more criticized loans in a recession, so banks have to rebuild their capital by reducing lending and lending only to the safest borrowers. Therefore, in a recession, government bank regulators force banks to be more conservative in their lending to the private sector, which leads the banks to buy more government bonds.

In my more cynical moments, I wonder if the economic geniuses in the Treasury Department, bank regulatory agencies and the Federal Reserve understand that they can force the banks to fund a larger portion of the huge federal deficit with cheap money by criticizing more bank loans to the private sector and crowding out private lending.
 
The analysis above assumes that all corporate excess money was kept in the U.S. As a practical matter, much of the unused corporate money is in offshore accounts being invested in foreign government bonds and private foreign loans. It is not being spent in the U.S. because U.S. tax policy severely penalizes U.S. companies that repatriate offshore profits.

The U.S. corporate tax rate is 35 percent, the highest in the developed world. The tax rates in Europe and Asia range from 10-25 percent. If U.S. companies repatriate that money back to the U.S., they will have to pay an additional tax of 10-25 percent (the difference between the U.S. corporate tax rate and the foreign tax rate). For example, if Microsoft has $1 billion from profits in its Hong Kong account, it would have to pay a repatriation tax of 15 percent, $150 million, to the U.S. government to repatriate the money back to the U.S.

Are you surprised that they leave the money in Hong Kong? No other country materially taxes repatriated earnings made in foreign countries. This means that they cannot spend, invest or distribute to shareholders the money from these offshore accounts in the U.S. without a severe tax penalty!
 
The bottom line is that government tax and bank regulatory policy is responsible for much of the idle cash in corporate tills sitting on the sidelines during this recession.