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U.S. House Speaker Paul Ryan spoke with staff at the Milwaukee Journal Sentinel on Sept. 1, 2017. During the interview, he made a claim about taxes on corporations being too high. (Rick Wood/Milwaukee Journal Sentinel) U.S. House Speaker Paul Ryan spoke with staff at the Milwaukee Journal Sentinel on Sept. 1, 2017. During the interview, he made a claim about taxes on corporations being too high. (Rick Wood/Milwaukee Journal Sentinel)

U.S. House Speaker Paul Ryan spoke with staff at the Milwaukee Journal Sentinel on Sept. 1, 2017. During the interview, he made a claim about taxes on corporations being too high. (Rick Wood/Milwaukee Journal Sentinel)

Tom Kertscher
By Tom Kertscher September 15, 2017

Paul Ryan: 35% corporate tax rate keeps $3 trillion in 'trapped cash' overseas from coming to U.S.

When U.S. House Speaker Paul Ryan met with Milwaukee Journal Sentinel staff on Sept. 1, 2017, an editor mentioned major tax cuts adopted under Republican President Ronald Reagan in 1981.

At first, Ryan joked around.

"The music was bad in those days, and the tax laws were as well," he replied, chuckling. "So, I think -- I’m not a big ‘80s music guy; I’m more of a ‘70s guy."

But the 47-year-old Janesville Republican quickly got serious. Arguing that U.S. taxes are stopping U.S.-based multinational corporations from bringing giant sums of money to America, he stated:

We've got about $3 trillion in trapped cash overseas that basically can't come back in this country because of our tax laws.

Ryan has made essentially the same claim a number of times, including on Milwaukee television, on CNBC, on Twitter and to the New York Times.  

So, do U.S. tax laws essentially prevent $3 trillion being held overseas from being brought to this country?

Keep the word repatriate in mind.

Taxing foreign earnings

The object of Ryan’s criticism is the U.S. corporate tax rate. At 35 percent, as we reported in a Donald Trump fact check during the 2016 presidential campaign, it is among the highest in the world -- though it’s worth noting that, after deductions, companies typically pay an "effective" rate that can be much lower.

(Trump, by the way, pledged during the presidential campaign to reduce the rate to 15 percent. That promise has been rated as In the Works on PolitiFact National’s Trump-O-Meter.)

As for the focus of Ryan’s claim, he’s talking about U.S.-based multinational corporations. More specifically, the foreign-earned profits of those companies. Here’s an example of how the taxation works:

If the company earns income in a country with a 20 percent corporate tax rate, it would pay that 20 percent tax immediately to that country. If that money is then repatriated -- that is, brought back to the company’s U.S. headquarters -- the company would pay an additional 15 percent to the U.S. government. (In other words, the U.S. tax rate of 35 percent minus the 20 percent already paid to the foreign country.)

So, as long as the profits stay parked overseas, there is no U.S. tax on it.

Now to the specifics of Ryan’s claim.

The $3 trillion figure

To back up Ryan’s statement, his office cited an April 2017 CNBC news article that said American companies are holding about $2.6 trillion in overseas earnings, and the figure has been growing.

That’s the latest estimate by Congress’ nonpartisan Joint Committee on Taxation, for 2015, although an estimate done in July 2017 for PolitiFact National put the figure at $2.8 trillion.

So, Ryan’s claim of about $3 trillion is reasonable.

It’s worth noting that the figure has been rising. In fact, considering only the Russell 1000 index of large companies, the amount of parked cash overseas has more than doubled since 2008, as shown in a July 2017 report by the Massachusetts research firm Audit Analytics:

Year

Amount of foreign-earned profits by U.S.-based companies kept overseas

2008

$1.09 trillion

2009

$1.19 trillion

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2010

$1.36 trillion

2011

$1.63 trillion

2012

$1.89 trillion

2013

$2.12 trillion

2014

$2.3 trillion

2015

$2.43 trillion

2016

$2.62 trillion

 
Now to the rest of Ryan’s claim.

‘Trapped’ and ‘basically can’t come back’

Ryan asserts that the money is "trapped overseas" and "basically can’t come back" because of U.S. tax laws

To be sure, a substantial amount of foreign profits are repatriated each year.

But Ryan didn’t invent the term "trapped cash." In fact, academics for years have referred to it as a commonly used term to describe the growing amount of cash held by U.S. multinationals overseas to avoid, or at least defer, paying the 35 percent U.S. tax rate.

Ryan’s claim is also backed by September 2017 paper published by the National Bureau of Economic Research, a nonpartisan organization in Massachusetts. The paper found a dramatic increase in U.S. corporations holding onto cash; that the cash is concentrated in foreign subsidiaries of multinational corporations; and that it is explained by low foreign tax rates.

News articles also have reported on the phenomenon.

In August 2016, Apple CEO Tim Cook said of his company’s profits parked offshore:

"We’re not going to bring it back until there’s a fair rate. There’s no debate about it."

Apple is second to Microsoft in the amount of cash parked overseas, according to Audit Analytics. And as the San Jose Mercury News reported in May 2017, the tax is such a deterrent that even though Apple was sitting on $240 billion in overseas cash, it has continued to borrow money. The reason: The borrowing cost Apple 4 percent or less, far below the 35 percent tax that would be paid for repatriating the overseas cash.

One more point before we close:

The companies would like to repatriate the money because bringing it back to the parent company enables them to do things such as paying dividends, doing stock buybacks and investing in U.S. operations.

Several academic experts told us that some of the overseas money, while not repatriated directly back to the companies’ U.S. headquarters, is invested in U.S. securities. That doesn’t trigger the 35 percent tax.

Our rating

Ryan says: "We've got about $3 trillion in trapped cash overseas that basically can't come back in this country because of our tax laws."

To avoid a 35 percent U.S. tax, U.S.-based multinational companies have opted not to "repatriate" roughly $3 trillion of their foreign profits, a figure that is growing. That is, they don’t bring the money back to their U.S. headquarters, where it can be used for things such as dividend payments or investments in their domestic operations.

But the overseas profits aren’t literally trapped and indeed some foreign-earned profits are repatriated, though they are subject to the 35 percent tax.

Ryan’s statement is accurate but needs additional information, our definition of Mostly True.

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https://www.youtube.com/watch?v=9e5f7I3pmiM
"We've got about $3 trillion in trapped cash overseas that basically can't come back in this country because of our tax laws."
In an interview
Friday, September 1, 2017

Our Sources

YouTube, Milwaukee Journal Sentinel editorial board meeting with Paul Ryan (7:00), Sept. 1, 2017

Email, Paul Ryan press secretary Ian Martorana,  Sept. 7, 2017

PolitiFact National, "Are there over $4 trillion of untaxed corporate earnings offshore, as Donald Trump said?" Aug. 3, 2017

CNBC, "Companies are holding a $2.6 trillion pile of cash overseas that's still growing," April 28, 2017

Interview, Urban-Brookings Tax Policy Center senior fellow and former legislation counsel with the Joint Committee on Taxation Steven Rosenthal, Sept. 12, 2017

Interview, Alan Auerbach, professor of economics and law and director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, Sept. 11, 2017

Email, U.S. Rep. Mark Pocan press secretary Ron Boehmer, Sept. 8, 2017

Interview, Institute on Taxation and Economic Policy senior policy analyst Richard Phillips, Sept. 12, 2017

Interview, Edward Kleinbard, Robert C. Packard trustee chair in law at the University of Southern California’s Gould School of Law and former chief of staff of the U.S. Congress' Joint Committee on Taxation, Sept. 12, 2017

PolitiFact National, "What's at stake in the tax debate?" Sept. 13, 2017

PolitiFact National, "Are there over $4 trillion of untaxed corporate earnings offshore, as Donald Trump said?" Aug. 3, 2017

PolitiFact Wisconsin, "Pledging cuts, Donald Trump says at Wisconsin rally that U.S. has highest corporate tax rate," Dec. 15, 2016

National Bureau of Economic Research, "Understanding Precautionary Cash at Home and Abroad," September 2017

Columbia University, "Permanently Reinvested Earnings and the Profitability of Foreign Cash Acquisitions," 2012

Journal of Corporate Finance, "The Relation among Trapped Cash, Permanently Reinvested Earnings, and Foreign Cash," January 2017

San Jose Mercury News, "Apple borrowing billions while sitting on huge overseas cash pile,"  May 10, 2017

Credit Suisse, "Park A-Lot Overseas," March 17, 2015

Boston Globe, "If US companies bring back billions from overseas, who profits?" Dec. 4, 2016

New York Times, "A Stranded $2 Trillion Overseas Stash Gets Closer to Coming Home," Nov. 4, 2016

Washington Post, "Tim Cook, the interview: Running Apple ‘is sort of a lonely job,’" Aug. 13, 2016

Joint Committee on Taxation, letter to U.S. Reps. Kevin Brady and Richard Neal, Aug. 31, 2016

Reuters, "U.S. companies push hard for lower tax rate on offshore profits," May 15, 2017

Interview, Audit Analytics chief operating officer Michael Nohrden, Sept. 13, 2017

Interview, Audit Analytics general counsel and director of research Donald Whalen, Sept. 14, 2017

Audit Analytics, "Indefinitely Reinvested Foreign Earnings: Balances Held By The Russell 1000
A 9-year Snapshot," July 2017

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More by Tom Kertscher

Paul Ryan: 35% corporate tax rate keeps $3 trillion in 'trapped cash' overseas from coming to U.S.

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