A New Democrat Network (NDN) study claims a dividend repatriation tax holiday (allowing multinational firms to return offshore earnings to the United States at a hugely discounted tax rate) would raise $8.7 billion in revenues over ten years – contrary to the Joint Committee on Taxation's (JCT) estimate that it would cost $78.7 billion over ten years – but NDN’s study rests on several flawed assumptions.
Most importantly, NDN’s study assumes another repatriation tax holiday would not encourage companies to shift more of their profits offshore (by using accounting practices or moving their “real” economic behavior, such as shifting jobs and manufacturing activity offshore). In fact, as JCT’s estimates reflect, this profit-shifting incentive is the single biggest reason why a second holiday would lose substantial revenue: “Enactment of a [repatriation holiday] for a second time in seven-year period likely signals to taxpayers that something like [this holiday] will become periodic, if not a permanent, feature of the Code.” As a result, it “encourages investment and/or earnings to be located overseas.”
Indeed, NDN’s study ignores the evidence that firms, anticipating a second holiday to follow the first one of 2004, have begun to shift their profits overseas at an increasing rate – and at a substantial long-run cost to the U.S. tax base.
We will discuss the flaws of NDN’s study in greater detail in a future paper. In the meantime, policymakers should be extremely wary of the assumptions on which the NDN study rests.