A Tuesday (12/9) column in the New York Times suggested the following partial solution to the current credit crunch: Give U.S. MNC corporations a tax holiday so that they repatriate their foreign retained earnings.
Many U.S. Corporations have foreign subsidiaries that do not use their earnings to pay their American parent company dividends. The writer suggests a tax "amnesty" (since these companies broke no law why is that an amnesty?) that will encourage the U.S parents to order their subsidiaries to start paying dividends. This, according to the writer, will "bring home dollars held abroad without paying corporate taxes of 35%". These extra dollars should supposedly help alleviate the credit crunch.
To understand why this argument is nonsensical you should recall that foreign subsidiaries keep their retained earnings in foreign currencies abroad. For them to bring this money back home they will need to convert it into USD. When selling their foreign currency, these corporations are going to be paid with a check drawn on a U.S. bank. The final outcome of this exercise would therefore be for ownership of these dollars (that are already deposited in a NY bank) to change. No new dollars are added to the banking system and liquidity remains unchanged.
Besides, What is the columnist talking about when he refers to a 35% tax rate? According to the U.S. Tax Code, parent owes no tax on dividends paid by a wholly owned subsidiary. Even dividends from a partially owned subsidiary are not taxed at this rate. Is there any tax accountant in this class who can help me with this?
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