As politicians dither over a sluggish economy, proposals to give corporations a tax "holiday'' on hundreds of billions in overseas corporate profits are suddenly back into fashion.
On the face of it, it seems like a good idea: The economy is still tepid and unemployment is high. Why not induce American multinationals—from Apple and Microsoft to Google and Cisco—to bring home the vast profits they have been racking up for years in foreign countries?
The U.S. government wouldn't miss the tax money, supporters say, because the companies weren't going to pay it anyway. Investment here would grow and jobs would be created. Everybody would win.
WIN America, a corporate coalition that includes many of the the country's brightest business stars, is pushing for the holiday. Cisco CEO John Chambers and Oracle CEO Safra Catz, in a Wall Street Journal op-ed in October, predicted that the move would create up to two million jobs and called the idea “the trillion-dollar elephant in the room."
And in the last week, House Majority Leader Eric Cantor, R-Va., added his support as well.
There's just one problem: veteran tax policy experts, Republican and Democratic alike, say it's a bad idea.
The Bush administration was staunchly against the idea in 2004, though Congress passed it as part of a broader corporate tax bill that year. The Obama administration is against it now. Tax policy experts across the political spectrum say the idea might simply encourage companies to park more of their future profits outside the country in the hope of yet another "holiday."
Analysts say the repatriation holiday in 2004 didn’t live up to the hype. In fact, many economists say a tax holiday—which would allow U.S. multinational companies to bring overseas profits (that haven't been taxed so far) home at a reduced rate of perhaps 5 percent, rather than the normal corporate tax rate that tops out at 35 percent—would do little to create jobs.
The 2004 holiday, which allowed companies to repatriate foreign earnings at a 5.25 percent rate, brought $362 billion back to the United States, $312 billion of it at a reduced rate, according to the Internal Revenue Service. The repatriated dollars accounted for 45 percent of foreign holdings at the end of 2004. But the move didn’t create the jobs that were promised.
“The balance of evidence at this point suggests [tax holidays are] not particularly successful at creating jobs, if that’s the goal,” said Joseph Thorndike, director of the tax history project at Tax Analysts. “You could make a marginally better case that as far as stimulus goes, they stimulate the economy, but they’re not the most effective form of stimulus.”
Still, the idea is gaining momentum.
“There’s an interest,” said Caroline Harris, the U.S. Chamber of Commerce's chief tax counsel. “There’s a lot of cash sitting overseas that people would like to see come back and be infused into the U.S. economy."
The idea has both Republican and Democratic supporters in Congress. In addition to Cantor, supporters include Sen. Barbara Boxer, D-Calif., who championed the 2004 tax holiday; Rep. Brian Bilbray, R-Calif., who introduced a repatriation bill; and Rep. Kevin Brady, R-Texas, who is currently “finalizing the language” on a bill, according to a spokesman.
Even the chairman of the House Ways and Means Committee is toying with the idea, in the context of broader reform of the tax code.
“The continuing interest in repatriation is yet another reminder that our current tax system is threatening American competitiveness and hindering job creation,” said a spokesman for Rep. Dave Camp, R-Mich, chairman of the tax-writing committee.
Supporters say the billions in federal revenue that a holiday would generate is money the government would otherwise be unable to get its hands on because it would stay overseas. But this free-lunch line of argument runs exactly counter to Assistant Treasury Secretary for Tax Policy Michael Mundaca’s assertion that the 2004 holiday “cost taxpayers billions.”
In a blog post on Wednesday, Mundaca said that “letting our eye off the ball of comprehensive tax reform in favor of a temporary measure of this kind would be a mistake.”
Critics say a holiday would be akin to rewarding companies that have already tried to dodge taxes by shifting profits overseas. Granting another “holiday” so soon after the last one, they say, may encourage companies to stash more money overseas.
Philip Swagel, a former assistant Treasury secretary for economic policy in the George W. Bush administration, said the holiday was a gimmick rather than a policy.
“Global competitiveness [in the tax code] will boost U.S. job creation, but one-off is not the way to do tax policy," said Swagel, now a professor at the University of Maryland. "Think about what’s good policy and do that, don’t just do this one-off.”