Deputy Director, Federal Tax Policy
Republican congressional leaders are reportedly making changes to their tax bill — such as cutting the top individual tax rate to 37 percent, from the current 39.6 — that would make the bill costlier and tilt it more to the wealthy. GOP leaders will reportedly “pay for” those added costs, which are intended to be permanent, in part with a higher tax rate on U.S. multinational corporations’ current stock of foreign profits. That, however, is a gimmick that conceals the true cost of the bill: it generates revenues by imposing a one-time tax on foreign profits that can’t be renewed, to pay for new costs that are intended to be permanent.
Currently, multinationals have about $2.8 trillion in profits booked offshore that have never been subject to U.S. corporate taxes. The Senate-passed bill had a mandatory one-time tax on those foreign profits, at rates of 14.5 percent for cash and 7.5 percent for non-cash assets (far below the current 35 percent U.S. corporate tax rate). Taxing the $2.8 trillion in foreign profits is sometimes labeled a “repatriation” provision, because it would deem that the foreign profits have been “repatriated,” or returned, to the United States in order to subject them to U.S. tax.
In effect, that would serve as a transition provision to subject the accumulated past profits to taxation before the United States moves to a new corporate tax system. (For new foreign profits, the bill introduces new and damaging rules that lose large amounts of revenues in the long term.)
Republican leaders now reportedly plan to set the one-time repatriation tax rate at 15 percent for cash and 8 percent for non-cash assets, which represents an expansion of the provision. That would raise more revenue from the tax. In and of itself, there’s nothing wrong with a higher tax rate on past foreign profits; those profits should be subject to a tax that’s as close to the current 35 percent rate as possible. (U.S. multinationals also get a federal credit for any foreign taxes that they pay.)
The problem is that Republican lawmakers would use the repatriation provision as a gimmick. They would use its one-time infusion of revenues to help pay for permanent tax changes. By definition, the one-time repatriation revenues cannot be regenerated. Once the federal government has taxed the stock of foreign profits, it can’t be taxed again.
The gimmick is designed to help Republican lawmakers meet the requirement, under the budget reconciliation process, that the bill cost no more than $1.5 trillion over the next decade. Under reconciliation, the Senate can pass this bill with just 51 votes, rather than the 60 votes that legislation normally requires.
Repatriation would provide a significant amount of one-time revenue. The Senate provision would have raised an estimated $262 billion over ten years. The higher repatriation rate that Republican leaders are setting for the final bill presumably would raise even more, enabling Republicans to more easily pay for their tax changes in the first decade. While many of these costly provisions may be set to sunset within the first decade, Republican lawmakers clearly intend for them to be made permanent down the road.
The repatriation provision helps conceal the permanent and growing costs of the bill’s other international tax provisions that — without the repatriation provision — would lose revenue over the next decade (see table). Further, they’ve already used this maneuver once. During last-minute changes that Senate Republicans made to their bill, they added more costly tax cuts that they intended to be permanent (including a larger deduction tilted to the wealthiest owners of “pass-through” businesses, such as partnerships, S corporations, and sole proprietorships). To help cover their cost, they expanded the repatriation provision to increase the revenues it would raise, as compared to the version of the bill that was first considered on the Senate floor.
|One-Time Repatriation Revenues Help Mask Permanent Costs|
|Net cost of Senate tax bill’s international tax provisions, 2018-2027|
|Senate-passed bill (7.5% rate on non-cash assets; 14.5% rate on cash assets)||Finance-passed bill (5% rate on non-cash assets; 10% rate on cash assets)|
|International provisions with repatriation included||+$261.8 billion||+$154.6 billion|
|Repatriation revenues alone||+$298.1 billion||+$184.8 billion|
|International provisions with repatriation excluded||-$36.3 billion||-$30.2 billion|
Source: Joint Committee on Taxation tables JCX-63-17 and JCX-57-17.
A responsible tax reform proposal would avoid using one-time revenues from a one-off tax on foreign profits to mask the long-term cost of permanent and growing tax cuts. For example, President Obama’s international tax reform proposal would have dedicated the one-time revenues from the repatriation tax to one-time infrastructure investments, not rate cuts or other provisions that were designed to be permanent.
Some senators, such as Jeff Flake, have already expressed concern about the gimmicks in the tax bill and have stated that they‘ve tried to reduce the legislation’s reliance on them. But GOP leaders and members of a House-Senate conference committee that are now ironing out a final tax bill seem to be heading towards increasing the number of gimmicks that mask the true cost of their tax cuts for the wealthy.