Members of Congress have a plan to get major corporations to bring profits they have stashed overseas back into the U.S.: offer them an 84 percent discount on the taxes they owe on that money.
The lawmakers’ stated goal is to generate enough revenue to preserve the federal Highway Trust Fund, which is expected to run out of money later this summer. But economists and analysts from multiple organizations in Washington are baffled by the idea that Congress wants to resurrect a program that failed miserably its first time around, and doesn’t promise anything better in the future.
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“In politics, bad ideas never go away, even after being shown to be bad,” wrote Thomas L. Hungerford, of the Economic Policy Institute. “A repatriation tax holiday is a case in point.”
The proposal, a primary backer of which is Senate Majority Leader Harry Reid (D-NV), is what’s known as a tax holiday or, if you prefer, a “repatriation tax holiday.” The standard corporate tax rate in the U.S. is 35 percent, and proposals currently floating around Congress would allow companies to pay only 5.75 percent, or thereabouts, on money they bring back home.
Because of the way the U.S. tax code is structured, companies based in the U.S. owe tax on profits earned anywhere on the planet – but only when that money comes back home. If it sits in a bank account offshore, it’s immune from U.S taxes indefinitely.
There are pretty good arguments that it’s a stupid system – virtually all developed countries other than the U.S. tax people and corporations on income earned within their borders, and don’t try to capture taxes from income earned overseas.
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Admittedly, it seems as though taxing U.S. companies on worldwide income would benefit the Treasury. But the fact is that because earnings aren’t actually taxable until they return home, they rarely do.
The tax holiday is meant to solve that problem, by bringing billions of corporate dollars back into the U.S., where they will ostensibly be invested in ways that boost job creation. But there are two problems here. The first is that we tried this once, and it didn’t go so well.
In 2004, Congress passed the American Jobs Creation Act of 2004, which contained a tax holiday provision similar to the proposals currently being considered. It was, at the time, expected to do much the same for the economy: bring assets home and create jobs through investment.
In the end, companies did bring the money home, but rather than creating jobs, write Chuck Marr and Chye-Ching Huang of the Center on Budget and Policy Priorities, “Firms largely used the profits that they repatriated during the 2004 holiday not to invest or create U.S. jobs but for the very purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to shareholders.”
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The second problem is that if we try it again, companies will assume tax holidays are a regular, maybe once-per-decade, occurrence, and will adjust their financial planning accordingly. Congress itself, when it passed the AJCA, specifically noted that the tax holiday provision ought to be a one-time thing so as not to lead to more and more profit being held offshore in the expectation that a season of low-tax repatriation was around the corner.
Even Congress’s own Joint Taxation Committee has found that while the proposal might boost revenues slightly in the first two years after passage, it would cost more, by a factor of ten, over the remainder of the decade. That’s because companies, realizing that tax holidays are something they can expect on a regular basis, will move even more of their profits to overseas affiliates, further reducing tax revenues.
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