Giving the dollar and economy strength: the tax holiday proposal

The US dollar has enjoyed being the world’s reserve currency for several decades. Most international transactions have some link in denomination to the dollar. Most commodity prices are indexed on the dollar. But in recent years the greenback has been on a downward trend: the United States imports more than it exports, creating a trade deficit. Oil, fashion products, cars, the list of items goes on. In 2010 the total imports amounted to $1.9 trillion, while exports totaled $1.3 trillion (source: US census bureau). By doing we are sending hundreds of billion of dollars overseas every year. Eventually, this puts pressure on the currency. How do we solve this?

The most potent solution is simple: turn the deficit into a surplus. Import less, export more. Ask China, it is working for them, to the point they decided to force the exchange rate between the Yuan and the dollar with a peg. Eventually, this will have to adjust as well. But there are other solutions. Today Bloomberg reports that a growing amount of US companies are proposing (through lobbyists) that the government gives them a tax break for repatriating profits from overseas.

“A lot of what companies report as foreign profit is really U.S. profit that should be subject to U.S. tax,” Sullivan said. “Those earnings didn’t get overseas by accident. Many of these companies intentionally put them there to avoid paying U.S. taxes.”

Of course these companies paid foreign taxes, which in this case must logically be lower than what they would have paid here. It’s a complex set of dynamics, because the same companies often get tax breaks from foreign countries so that they bring jobs there, so the decisions to operate in a foreign nation is not just a factor of tax on income but overall cost structure, involving the cost of salary and of operating in a particular location.

Everything else being equal, this seems like a reasonable debate to have: if companies can bring profits back, they are effectively buying US dollars. By itself, this would have a positive impact on restoring the currency strength.

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