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.”
Indeed, temporary measures can skew incentives. Many supporters of comprehensive tax-reform said that companies have reinvested even more of their foreign profits outside the country since the end of 2004.
Proponents counter that the economic situation today – with its stubbornly high unemployment, skittish investors and record-high federal deficits – makes such concerns moot.
Treasury Secretary Tim Geithner has said the administration might be open to a tax holiday if it's part of a fundamental tax reform. Cantor argued this week that the tax holiday would be a first step toward real tax reform.
“Forging consensus on this type of fundamental tax reform will take time, so in the meantime I propose that we allow U.S. multinational companies to bring back almost $1.2 trillion in overseas profits at a lower tax so they can invest in our economy here at home,” Cantor said in a speech at Stanford University on Monday.
When the holiday passed in 2004, economists were worried about a shortage of cash in the market. But today, loose monetary policies mean cash is anything but tight. And corporations are estimated to be sitting on trillions, a point critics of the tax break make when asking why large multinational corporations need a money infusion.
Chambers and Catz contended that corporations are sitting on cash in part because of problems with the United States' policy of taxing profits of American companies wherever they are earned. That policy is almost unique in the world.
“Large cash balances remain on U.S. corporate books because U.S. companies can't spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability,” the two executives wrote.
Opponents of the repatriation holiday predict that companies would use the money to buy back shares and pay shareholders rather than create jobs. But others say that would actually be better than a strings-attached approach like the one taken in 2004. In that effort, corporations had to produce plans for how they would invest the money and hire workers in the United States.
But many of the biggest beneficiaries in 2004 actually reduced their workforces in the United States.
Among Washington tax experts, the issue can be touchy. At least one formerly outspoken opponent of the last tax holiday refused to comment about the idea now because a corporate client is pushing for it.
Champions of the idea say that politics and what happens with the repatriated money isn't really the point – the tax holiday is not the end goal.
“Leader Cantor believes that we need to do comprehensive tax reform, and repatriation is a part of that which we can do more quickly to spur economic growth,” said Cantor spokeswoman Laena Fallon. “It’s part of our larger plan, and it should be viewed in that context.”