Latest Corporate Tax Repatriation Proposal Fails the Test of Sound Policy

Senators Kay Hagan (D-NC) and John McCain (R-AZ) announced a proposal today to allow multinational corporations to bring home (or “repatriate”) earnings held overseas, for a temporary period of time, at a tax rate of just 8.75 percent — a fraction of the regular 35 percent corporate tax rate.  They, and the massive corporate lobbying campaign that’s pushing for a corporate repatriation holiday, claim it would create jobs and boost the economy as firms invest the repatriated profits in the United States.  The reality, however, is that the new proposal suffers from the same serious flaws as other “repatriation” proposals.

As Goldman Sachs concluded in an analysis of repatriation proposals it issued yesterday, “The short-term economic benefits of such a policy would likely be minimal.”  Goldman Sachs explained, “we would not expect a significant change in corporate hiring or investment plans:  most firms with large amounts of overseas profits are likely to have adequate access to financing, so the availability of cash on hand is unlikely to be a constraint on investment at the present time.”

The proposal includes an advertised “incentive to create jobs”:  a rate as low as 5.25 percent for firms that increase their payrolls.  This is a fig leaf because companies can get a deeply discounted rate of 8.75 percent (from 35 percent) with absolutely no strings attached, even if they create no jobs.

The proposal as a whole is deeply flawed:

• It would repeat an embarrassing policy failure. Congress enacted a corporate repatriation holiday in 2004, following a similarly intense lobbying campaign.  A wide range of studies — by the National Bureau for Economic Research, Congressional Research Service, Treasury Department, and outside analysts — found no evidence that it produced any of the promised economic benefits.Firms mostly used the repatriated earnings not to invest in U.S. jobs or growth but for purposes that the legislation sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders.  Moreover, many firms actually laid off large numbers of U.S. workers even as they reaped multi-billion-dollar benefits from the tax holiday and passed them on to shareholders.

• It would be an even bigger mistake the second time around. Enacting a second repatriation holiday within a decade would send a clear signal to companies that more would come in the future, encouraging them to invest overseas (resulting in more jobs outside rather than inside the U.S.), sit on the profits, wait until the U.S. unemployment rate spikes, and then lobby for a new repatriation holiday.  Such a cycle only deepens the deficit and nation’s debt problems.  That’s why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time-only event.A second tax holiday would also encourage companies to shift profits actually earned in the United States to offshore tax havens to avoid U.S. corporate taxes, and then bring them back during a future tax holiday at a massively reduced tax rate.

• It’s entirely unnecessary, as the corporate sector is flush with cash. Corporations have a record $2 trillion in domestic cash and liquid assets on hand, the Federal Reserve reports — money they aren’t investing because they haven’t found good investment opportunities in the current weak economy, with consumer and business spending depressed.  As a recent Bank of America Merrill Lynch analysis concluded, “Today, businesses are investing slowly not because their tax burden is high but because demand for goods and services is soft.  Supply-side measures such as a tax repatriation holiday will have limited effect in what remains a demand-deficient economy.” 

• It’s unfair to domestic companies. Small and large companies around the country have invested in the United States, created jobs, and paid their taxes.  Yet these domestic firms wouldn’t be eligible for the huge tax breaks the repatriation holiday would lavish on the foreign profits of large multinational corporations. 

• It’s no free lunch. Senator McCain claims the new proposal would increase federal revenues (a central part of the lobbying campaign). Congress’s Joint Committee on Taxation has evaluated similar proposals and found they would do just the opposite — cost the Treasury tens of billions of dollars over the next decade by encouraging U.S. multinationals to shift more and more of their investments overseas.