In May 2011, Representative Kevin Brady (R-TX), a senior member of the Ways and Means Committee of the House of Representatives, introduced the Freedom to Invest Act of 2011 (H.R. 1834, 112th Congress). The bill amends Section 965 of the Internal Revenue Code to allow companies that do business both inside and outside the United States the opportunity, for one year, to bring to America earnings they hold overseas, without paying most of the extra tax to the U.S. that would otherwise apply to the earnings. The bill cuts taxes, and tax cuts generally are good things, but the American people should not expect too much from enactment of the legislation. In particular, they should not expect the creation of lots of jobs as a result of the legislation.

If H.R. 1834 were enacted, companies would undoubtedly respond to the one-time tax cut by bringing more of their earnings to America during the year of the tax cut. In 2004, the United States tried a similar one-time tax cut on earnings and, although less than ten percent of the corporations that controlled foreign corporations brought earnings into America, the amount they brought in was significant.[1] Of the $362 billion they brought into America, $312 billion qualified for treatment under the one-time tax deduction, which yielded total tax deductions of $265 billion.[2] Not all that much of the earnings brought in went into job-creating investments in the United States, although much went into other useful activities.[3]

H.R. 1834 is wisely titled the “Freedom to Invest Act” rather than the “Job Creation Act.” Enactment of the legislation may have some useful benefits, but large numbers of jobs are not likely to be among them, as companies generally already have access to plenty of capital at low rates if they see economic opportunity in job-creating investments.[4] Nevertheless, it certainly will not harm the economy to encourage a company to bring more of its earnings into America for a year and it may be of limited help, such as if companies use the earnings to free up other company funds that can then be used to increase dividends to shareholders.

The provisions of H.R. 1834 mandating certain company employment levels on pain of higher taxes are not consistent with sound conservative principles. The provisions require a company that benefits from the one-time tax deduction for earnings brought into America to maintain its average employment level for two years, or else take certain amounts of the earnings brought into America back into income to be taxed. A provision by which the government directs a company to either employ a certain number of people or pay taxes is inappropriate when measured by the principles of free enterprise and limited government.

Those who seek the solution to America’s economic woes—including the problem of U.S. tax laws that discourage companies from bringing earnings into the U.S.—should read Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, available on The Heritage Foundation website. The Heritage plan would drive down government spending and debt, protect America, and balance the budget without raising taxes. The Heritage plan includes broad tax reform for both individuals and businesses.

Unlike the one-shot H.R. 1834, the Heritage plan changes business taxes so that they apply permanently on a “territorial” principle—that is, the business tax base would include income generated by sales of goods and services in the United States and would exclude income from foreign sources (the latter income having been taxed by the foreign country in which it was earned). Thus the Heritage plan would eliminate permanently—not just for one tax year as does H.R. 1834—the disincentive to move corporate earnings into the United States. To give substantial and permanent to help the economy, the country should pursue Saving the American Dream.

[1] Section 965 of the Internal Revenue Code, as enacted by Section 422 of the American Jobs Creation Act (Public Law 108-357, October 22, 2004).

[2] Melissa Redmiles, “The One-Time Received Dividend Deduction,” U.S. Internal Revenue Service, Statistics of Income Bulletin, Spring 2008, at

[3] Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, “Watch What I do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” National Bureau of Economic Research (NBER), Working Paper No. 15023 (June 2009), at (“First, the domestic operations of U.S. multinationals were not financially constrained at the time of the Act. The ability to access an internal source of capital at a lower cost did not boost domestic investment, domestic employment or R&D. . . . Second . . . the estimates imply that every extra dollar of repatriated cash was associated with an increase of $0.60-$0.92 in payouts to shareholders, largely in the form of share repurchases. . . . Third, the results indicate that the fungibility of money rendered regulations aimed at directing financial policy ineffective. A key goal of the legislation was to increase investment and employment in the United States. The [law] included specific guidelines on how cash repatriated at the lower tax rate could be used in order to promote this goal. This paper clearly shows, however, that these guidelines were ineffective in getting repatriating firms to increase their domestic activities. . . . Estimates imply that firms returned most of the repatriated cash to shareholders—even though such expenditures were not a permitted use of repatriations qualifying for the tax holiday. It is important to emphasize that the results do not imply that firms violated any of the provisions of the [law]. Rather, they reflect the fact that cash is fungible. A tax policy that reduces the cost of accessing a particular type of capital will have difficulty affecting how that capital is used. Thus, the overall effect of what firms did differed from what their public statements indicated they would do and from what the regulations ostensibly intended.” pp. 25-26). Michael Faulkender and Mitchell Petersen, “Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act,” NBER Working Paper No. 15248 (August 2009), at (“While we found an increase in investment among the financially constrained firms, most firms that have foreign operations with significant permanently reinvested foreign income are not financially constrained.  This is why we find that most firms which repatriated under the act did not subsequently increase investment.” p. 40). See, Allen Sinai, “Macroeconomic Effects of Reducing the Effective Tax Rate on Repatriated Foreign Subsidiary Earnings in a Credit- and Liquidity-Constrained Environment,” Decision Economics, Inc., revised January 30, 2009 (Table 1 (p. 2) reflects that, of the funds repatriated under the 2004 Act, only 23% were accounted for as being used for “Hiring and Training of U.S. Employees.”).

[4] Board of Governors of the Federal Reserve, April 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices (May 2, 2011) at (“Banks continued to ease standards and terms for C&I [Commercial & Industrial] loans. The majority of respondents that had eased standards and terms on C&I loans cited increased competition from other banks and nonbank lenders as the most important reason for the easing.” p. 1).