BEYOND THE NUMBERS
A coalition of large multinational corporations has launched a major lobbying campaign for a temporary “repatriation tax holiday” that would allow companies to bring foreign-generated profits back to the United States at a strikingly low tax rate of about 5 percent. They’re promoting the measure as a cost-free way to boost domestic investment and jobs — the same pitch that proponents used to sell Congress on a similar tax holiday enacted in 2004.
But as we show in a new paper, the first holiday mainly benefited corporate shareholders, not the U.S. economy, and a second holiday would be an even bigger mistake. Far from being cost-free, it would expand deficits by tens of billions of dollars over the coming decade. And just as many companies responded to the 2004 holiday by shifting even more profits overseas (see graph), a second holiday would further embed the shifting of investment, jobs, and profits overseas as a major tax avoidance strategy — precisely the opposite of what its backers claim.
Here are our key findings:
- A tax holiday enacted in 2004 failed to produce the promised economic benefits. The evidence shows that firms mostly used the repatriated earnings not to invest in U.S. jobs or growth but for purposes that Congress 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.
- Repeating the tax holiday would increase incentives to shift income overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future. That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States. That’s why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time-only event and should not be repeated.
- The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious. U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959. The ten companies lobbying hardest for a new tax holiday alone have at least $47 billion in cash and other liquid assets that could be used for domestic investments — without triggering additional tax liability.
- Some of the biggest beneficiaries of a tax holiday would be firms that have aggressively shifted income overseas. Companies in the technology and pharmaceutical industries have been particularly aggressive in shifting income abroad because they rely on intellectual property, which is relatively easy to shift to other countries as a tax avoidance strategy. Half of all repatriations from the 2004 tax holiday came from companies in these two sectors alone. The same corporations and sectors would stand to benefit disproportionately — and enormously — from a second tax holiday.