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Warren Buffett: Why Tax Repatriation Is a Bad Idea

October 08, 2011 | About:
Many economists think that tax repatriation is a good way to “bring cash home.” Warren Buffett thinks it is a bad idea.

Below are Buffett’s thoughts from a recent interview.



About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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Comments

Sivaram
Sivaram - 2 years ago
Pretty insightful point. Others may disagree (many readers here will personally profit from lower taxes) but I think Buffett is correct if you care about the country. Unless the goal of the government is to permanently eliminate the repatriation tax, there is little point in temporarily lowering it. All that will do, as Buffett points out, is to make everyone believe that the govt will let them off the hook in the future. Hence, leading to investment overseas again.
roke6362
Roke6362 - 2 years ago
I think an indirect point WEB makes is that (in his example, Ireland), corporations pay a 12.5% tax rate. WEB himself said in this interview that the low tax rate is incentive to manufacture and sell products in foreign countries that have a permanent, low rate of taxation.

The last time the USA offered a tax incentive on repatriation of corporate profits, companies brought cash back to the USA and bought back stock, according to WEB. Therefore, savers and investors became wealthier.

I think that is the American dream, isn't it?

Maybe the reason that most large, multi-national corporations now generate more revenue outside of the USA is because of the following reasons:

Lower taxation

Lower labor costs

Lower regulatory costs

Higher growth/profit potential

The USA has the biggest economy in the world by a large amount. Per capita income is higher than the rest of the world.

According to WEB, the USA also has the largest percentages of corporation taxation.

I'm not positive, but don't we also have the largest population of union labor, and regulation in the world.

These things, combined with our overall economic size keeps us from growing at a rate level comparable to China, or other developing economies (India, Korea, Brazil, etc.).

The only way to create wealth is to create an economic environment that motivates entreprenuers to develop new ideas, and investors to risk capital for the potential to make more wealth.
Sivaram
Sivaram - 2 years ago


ROKE6362: "I'm not positive, but don't we also have the largest population of union labor, and regulation in the world."

Nope. I have to check the numbers again but I believe USA has a lower unionization rate than Canada, most European countries (including Germany, France Britain, Sweden, Norway, Finland), and Japan. USA probably also has some of the lowest regulatory barriers in the world. It is far easier to start and dissolve a business in the US than most developed countries and most developing countries.

ROKE6362: "These things, combined with our overall economic size keeps us from growing at a rate level comparable to China, or other developing economies (India, Korea, Brazil, etc.)."

Most of the growth in those countries you cite are due to them being poorer and starting from a lower base.

ROKE6362: "The only way to create wealth is to create an economic environment that motivates entreprenuers to develop new ideas, and investors to risk capital for the potential to make more wealth."

Agreed... but how does temporarily waiving repatariation tax accomplish any of this? There will always be countries with lower taxes but so what?
roke6362
Roke6362 - 2 years ago
I wasn't certain regarding union labor in this country, as I said. I stand corrected.

Your second comment that mentions "starting with a lower base" is also my point. Because our overall base is higher than these other countries, we have to do things these economies cannot do in order to achieve adequate business growth.

Lastly, your question about my comments pertaining to tax repatriation. Part of the reason the large companies invest in developing countries is because of the tax incentives offered to them, as well as a labor cost incentive.

My point is WEB's argument against a tax repatriation holiday is also an indirect argument for lower corporate taxes in the USA. If bringing this money home is good for the economy and for the stock market, lower tax rates for corporations will allow this money to come home.

Lower tax rates will also create more free cash flow to invest and grow.

Non-union labor costs less than union labor, for the most part. At least part of the reason companies are building plants in other countries is because it is cheaper to manufacture in those countries and ship it back home for sale, than it is to make and sell it domestically.

When companies can produce their products at a lower cost in the USA than they can overseas or in Mexico, they'll do it.

They'll call that labor repatriation.

Thanks for the debate.
Sivaram
Sivaram - 2 years ago


ROKE6362: "Because our overall base is higher than these other countries, we have to do things these economies cannot do in order to achieve adequate business growth."

Agreed. Basically, rich countries need to be more productive than poor countries. That's how it has always been. Usually, this means developing new products and services that are more valued, or using technology and business processes to improve the existing products and services. But, my opinion is that tax policy has little to do with any of this.

ROKE6362: " Part of the reason the large companies invest in developing countries is because of the tax incentives offered to them, as well as a labor cost incentive."

If tax incentives or labour costs were all that mattered, countries like USA and Canada would never have gone anywhere in the last 50 years. After all, taxes and labour costs were far higher in these regions than almost all of South America, Africa, Asia, and most of Europe for the last 50+ years. Taxes in USA were as much as 3x higher in the 40's, 50's, 60's and 70's (top marginal income tax was as high as 90%; corporate taxes were maybe 50% higher than many other countries; and so on). Yet, these countries still did well, and in fact USA was in a boom all throughout the 50's and 60's.

ROKEY6362: "Lower tax rates will also create more free cash flow to invest and grow."

If lower tax rates were all that mattered, most African countries, where taxes are lower and people and corporations dodge taxes, would be the most prosperous. All the low-tax regions like Bahamas, Virgin Islands, etc would be the home of the all the corporations and most people would flock there. Yet that is hardly what happens in the real world.

It's also questionable that the lowest-taxed countries and regions are more likely to become prosperous. I'm not arguing for the corrolary (i.e. higher taxes equals more prosperity) but lower taxes don't appear to have any correlation with wealth creation. This is probably because lower taxes does not necessarily mean improved long-term investment.

You can look across countries but perhaps the best example is within a country. Compare the Southern states in USA, such as Texas or Florida, which have historically had lower taxes (usually lower state tax and financial incentives for companies to relocate there); versus the historically higher-tax regions like New York, New Jersey, or even California. Here is a wikipedia entry on median household income by state.

You'll note that states like New Jersey, New York, California, etc -- all with historically higher taxes and presently higher taxes too I believe -- have way higher median household income than Texas, Mississippi, Oklahoma, Alabama, and Florida. Yes, this is just income and cost of living is higher in the richer states, and the richer state citizens are carrying higher debtloads but if we just look at income as a proxy for wealth creation over the last 50 or 100 years, there is no doubt in my mind that the higher-taxed states like New York have created way more wealth than the lower-taxed than Texas (as an example).

To sum up, if corporate profits are repatriated at a lower tax rate, I don't think it will do anything positive in the long run. It'll be a short-term injection, like what happend under the Bush administration when they waived the taxes, and lead to no long-prosperity at all!

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