Will a US Tax Holiday Boost US Interest Rates?

There's an interesting video clip over at Reuters Breakingviews on how measly yields on interest-bearing instruments may increase Stateside in the aftermath of the declaration of a tax holiday. Designed to repatriate profits that US multinationals hold abroad by offering concessions on the statutory 35% tax rate to, say, 5.25% (which most corporations dodge anyway--witness those allegedly paying no taxes despite being profitable), the seemingly unrelated and surprising result may be higher yields.

In a nutshell, the argument is that firms which hold a collective $1.4 trillion or so overseas would have to liquidate their existing US Treasury holdings to bring home their foreign income. While I do have doubts about (a) the amount of Treasury holdings firms have and (b) the need to sell such holdings to effectuate repatriation, the video clip presents some thought-provoking ideas.

There's also talk of tax holiday "Dutch disease" insofar as benefits from additional government revenue may be blunted by a stronger dollar from these inflows hurting exports according to the Congressional Report Service.

Either way--the tax holiday's normative implications aside--there are interesting economic implications that may mitigate the revenue-enhancing argument for such an act.

11/4 UPDATE: Here is the text from Reuters Breakingviews if you're unable to access the clip above. Their reasoning involves MNCs having substantial holdings overseas kept not in cash but in nearly as liquid US Treasuries:

Another snag exists: much of the money is invested in Treasuries. The side effects of companies dumping all that paper need to be factored into the equation. Most of the overseas money is on the balance sheets of blue-chip pharmaceutical, technology and consumer goods companies with significant foreign sales and profits.

They include Pfizer, Microsoft, Cisco Systems and Procter & Gamble. Bringing the money home would mean paying taxes, so companies are hoping for a break from the current 35 percent top rate. Microsoft, for example, has $56 billion of cash on its books, $51 billion of which is outside the United States and almost entirely invested in Treasuries.

Securities filings suggest this is typical of multinationals. Investing in United States government bonds mitigates currency fluctuations, carries very little risk and keeps holdings liquid.