One Way to Create More Jobs without Increasing the Deficit

At last week’s Jobs Summit, President Obama said he’ll consider any good idea to create jobs.  I heard him say it, and I believe him.  His speech yesterday at the Brookings Institution offered some decent, standard approaches, including more infrastructure spending and tax breaks for small businesses.  The President would be well-served to cast his policy net a bit wider.  Since the Great Recession began, the economy has shed an astounding 7.3 million private-sector jobs – and based on the last two recoveries, businesses could continue to cut back their labor forces for another year or longer.  The President and Congress can create more government jobs whenever they like, for example by giving states an additional $50 billion or so targeted to jobs.  But finding the right lever to get private companies to hire more people than they would otherwise is a lot harder. 

The most direct and sensible approach is to somehow reduce the costs of hiring for companies.  The unsurprising catch is that the incentives required to get them to hire a million or more new people, whom otherwise they wouldn’t have hired, are very expensive.  So, most serious jobs proposals would either drive up our already-mammoth deficits or require a significant new tax.  

Most, but not all, because there is one approach I know of that wouldn’t cost taxpayers anything.  The foreign subsidiaries of America’s multinational companies currently hold offshore an estimated $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax on those earnings until the parent companies bring them back to the U.S. parent company.  The challenge is to leverage these funds for job creation at home, by creating a strong incentive for them to bring back a share of those earnings tied to a requirement that they use the funds to finance new hires.  It’s the closest thing to “found money” that this administration and Congress will ever find. 

We actually tried this once before, in a fashion, and it worked reasonably well.  In 2004, Congress slashed the corporate tax on such “repatriated” earnings for one year, from 35 percent to 5.25 percent, and IRS data show that it increased net inflows of those earnings by $312 billion, including $252 billion by U.S. manufacturers.  The 2004 law also told companies they had to use the new funds they brought back to, among other things, finance new workers, new investment, or pay down domestic debt.  Recent surveys found $73 billion of the repatriated earnings went to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt.   Here’s the free lunch: In the short run, the temporary program raised $34 billion in new federal revenues.  And it may not even have reduced revenues over the long-term, or not by much, since without the tax break, most U.S. multinationals keep their foreign-source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes. 

We can estimate what would happen if we tried this approach again.  A recent analysis I did with AEI’s Aparna Mathur found that such a policy could bring back $420 billion in foreign-source income now held abroad.  And if the program were targeted again in the same way as in 2004, it could mean $97 billion for new employment, or enough to create or save 2.6 million jobs over two years, as well as $101 billion for new capital spending, enough to produce long-term wage gains of 1.3 percent.  

Skeptics will claim that most companies would use their repatriated funds in other ways, such as stock buy-backs; and since money is fungible, the government couldn’t stop them.  Two academic studies built models which inferred that this happened last time; but there’s no real evidence that companies evaded the restrictions, and a recent academic survey suggests that most did follow the law.  Even if some didn’t, we can tighten the restrictions this time.  We could allow multinationals to bring back offshore earnings for one or two years and pay just 5 or 10 percent corporate tax on them here, so long as they use those funds only to create new, net jobs or increase their net investment.  That means they would have to not only hire new people, but expand their overall workforces. It might just help businesses create between 1 million and 2 million new jobs while actually reducing the deficit, which seems like the kind of new idea the President is looking for.