Why A Repatriation Tax Holiday is Still a Bad Idea

By :: October 13th, 2011

In another one of those bad ideas that never seem to go away, Congress may be about to grant a huge tax break to multinational companies that have stashed earnings in their foreign subsidiaries.

A temporary tax holiday for firms that return those profits to the United States is the latest evidence that bipartisanship is rarely what it’s cracked up to be. The latest version was proposed by senators Kay Hagan (D-N.C.) and John McCain (R-AZ).

And in one of those only-in-Washington moments, Senator Chuck Schumer (D-NY) and others want to use this massive tax cut to pay for a new infrastructure bank aimed at boosting domestic investment. How does a huge corporate tax cut (an earlier version would give away $79 billion over ten years) generate revenue? Easy. Firms would pay about $25 billion in new taxes during the temporary holiday, but save more than $100 billion down the road as they return fewer dollars to the U.S.

Hagan and McCain claim such a tax holiday would encourage multinationals to bring an estimated $1 trillion in overseas earnings back to the U.S., where they'd use the cash to create jobs and buy American-made equipment.

The reality, sadly, is quite different. There is no evidence that a similar break created any new jobs when Congress tried it in 2004. Instead, most of the repatriated dollars went to shareholders in the form of dividends or stock buybacks (which raise equity prices).  

Yet, multinationals are salivating over the prospect of a holiday. Jesse Drucker over at Bloomberg reports that 160 lobbyists are working the issue. Even Apple and Google—normally bitter corporate rivals—are singing from the same hymnal.  

No wonder. The Hagan-McCain bill would allow firms to pay just an 8.75 percent tax to bring home overseas earnings—far lower than the top corporate rate of 35 percent. They can get the rate down to 5.5 percent if they increase payroll in 2012 (not hard if the economy improves as many expect).

But with corporate tax reform in the wind, a holiday today could provide an extra windfall. Here’s why:

Corporate tax reform could include both a lower rate and a shift to a territorial system, which would exempt foreign earnings from any U.S. tax (and require overseas firms to pay U.S. tax on what they earn here).  But the real key will be the transition from today’s rules to the new system. It is likely, given big budget deficits, that earnings already sitting overseas would be taxed at a rate higher than 5.5 percent or even 8.75 percent. So, savvy multinationals would much rather bring the dough back now at an extremely low rate and avoid paying a bigger transition tax in a couple of years.

It’s a win-win. Maybe they get lower rates and reform. If not, they’ll get a big break today and perhaps another holiday down the road. Sweet.      

Will the holiday create jobs, as advertised? It didn’t work in 2004 and may be even less successful  today. Firms are already sitting on more than $2 trillion in cash, more than enough to hire or invest. In the absence of growing demand for their goods and services, it is hard to see letting them move around another $1 trillion is going to boost jobs.  Worse, if firms come to expect a regular holiday, they’ll stash even more profits overseas while they await the next windfall. That will make less money available for domestic hiring and investment.

At the same time, some successful firms that would have hired anyway will just enjoy the windfall.   

In recent weeks, Republicans have made a passionate argument against temporary tax cuts when it came to President Obama’s plan for a short-term payroll tax holiday. An even stronger case can be made against a temporary corporate tax holiday.  Yet, here we are.

Finally, something Congress may be able to agree on. Too bad.  

 

9Comments

  1. Michael Bindner  ::  3:09 pm on October 13th, 2011:

    What is worse is the fact that they want this to take effect while dividend taxes are 15%, knowing that any compromise will increase the rate and no compromise means they will be taxed at normal income (39.6% at the top marginal rate). Pointing out this fact is most important, especially if Occupy Wall Street finds out about it and pays the Gentleman from New York a visit.

  2. Vivian Darkbloom  ::  4:24 pm on October 13th, 2011:

    “No wonder. The Hagan-McCain bill would allow firms to pay just an 8.75 percent tax to bring home overseas earnings—far lower than the top corporate rate of 35 percent. They can get the rate down to 5.5 percent if they increase payroll in 2012 (not hard if the economy improves as many expect).”

    I would hope the cost of bringing back earnings to the US would be less than 35 percent. Normally, one should not need to pay tax twice in order to operate a business outside the United States. I sure hope people are not reading this blog in order to come away with a better understanding of the US tax system. In reality, the proposal means that the effective total tax rate on earnings brought back to the US would be anywhere from 8.75 percent to 35 percent (and above), depending on the amount of foreign taxes already paid on those earnings. So, the 8.75 (or 5.5) percent rate is the *minimum* effective total tax rate, not the maximum.

    I agree this is a bad proposal; however, it is a bad proposal only because Congress has not gotten around to the better alternative of fixing the current broken system of taxing the foreign earnings of US domiciled companies. Those complaining about it should perhaps be concentrating their efforts on pushing for meaningful reform that would make these temporary fixes unncessary.

  3. Ralph H  ::  11:09 am on October 15th, 2011:

    In my opinion (shared even by Mr Obama, apparently)the corporate tax rate is too high. To the extent this lowers it it is not so bad a proposal. Picking up on Vivian’s comment most of the earnings have been taxed locally, so it is disingenuous to label this as tax avoidance. If you want to do the “right” thing how about lowering the top rate, avoid double taxing foreign earnings, and perhaps adjust the corporate tax table (this would encourage more companies to be a “C” vs “S”, and adjust for the tax breaks given to individuals.

  4. Ess  ::  6:33 pm on October 15th, 2011:

    I find it so difficult to opinion to these articles when it seems difficult enough to merely determine the effects of taxes on companies, especially when at an international level. If you can recommend some good (online) reading to help explains what we know so far that would be so useful!

  5. Bill Holden  ::  11:23 am on October 21st, 2011:

    As to whether this is a good idea or not, please click on the “2004” hot link above for an analysis. You will find this is just another piece of corporate welfare.

  6. Steve D  ::  1:35 pm on October 31st, 2011:

    As I understand it, the double taxation issue is nonsense since corporations get generous credits for taxes paid to foreign governments. And you can bet that corps are careful to set up shop in those countries and reroute even their U.S. profits through countries with the absolute lowest rates. Besides, most large U.S. corps. with overseas earnings don’t pay anywhere near the 35% rate because of loopholes; Carnival Cruise Line pays 1% tax on profits a year, Yahoo around 12%, biotech firms around 7% – only utilities pay in the neighborhood of 30%. Point is, it’s patriotic to pay taxes and support the U.S., but all corporations want to do is wriggle out from under, claiming they’ll hire with the proceeds of the tax holiday, while the biggest companies (not medium and small business that employ 80% of Americans) are sitting on 2 trillion in cash and currently NOT hiring. It did not work in 2004 and it will not work now, in terms of increasing employment. I say: NO tax holiday, and eliminate loopholes.

  7. Mike Budd  ::  1:59 pm on December 30th, 2011:

    Good point.

    I have in mind some other examples where we have no evidence that this kind of measure created any new jobs, we only know the total cost for sure ;-)

    To be honest I don’t like the way “multinationals” are presented here. What could we do?? Of course “multinationals” are greedy ( because stockholders are, and so many people like you, like me), they are so well organized for fiscal optimization, they pay brilliant people for that, but in the end they just play within the legal rules! At least most of them ;-)
    Sincerely I can’t think of a better system than the current one, maybe with less “creativity” in finance and a bit more “governance”?
    Because “multinationals” will not develop a social responsibility by themselves, if they are not forced to ;-)

    My 2 cents anyway :-)
    All the best,
    Mike

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