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Some (Tax) Holidays Are Much Better Than Others

Two very different “tax holidays” are on the table as policymakers consider ways to help the sluggish economy.  Only one of them would work.

For months, corporate lobbyists have sought to convince Congress to enact a second “repatriation” tax holiday on overseas profits that they bring back to this country.  (The first was in 2004.)  A truth-in-advertising brochure would highlight that:

  • The 2004 holiday was a major policy failure that did not 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 windfalls from the tax holiday and passed them on to shareholders.
  • Repeating this tax holiday would increase incentives to shift investments 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 foreign tax havens and less likely to invest in the United States.  That’s why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time event.
  • This would be a costly holiday for taxpayers. Congress’ Joint Tax Committee estimates that another repatriation holiday would cost $79 billion over ten years.

The other tax holiday under consideration makes much more sense, and could garner support from small and large businesses and lawmakers on both sides of the aisle.  Bloomberg reports that Administration officials are discussing a temporary cut in employers’ share of their workers’ payroll taxes.  That would complement the temporary cut in workers’ share of payroll taxes that Congress enacted last December.

The Congressional Budget Office (CBO) ranks payroll tax holidays for employees and employers as among the most effective ways to spur growth and jobs — second only to increased unemployment benefits.

Last week’s discouraging unemployment report was a reminder for policymakers that we must do more to help millions of Americans find jobs so they can support their families and expand the economy.  A repatriation tax holiday wouldn’t help these people; in fact, it would hurt them by encouraging companies to invest more abroad rather than home.  A payroll tax holiday, in contrast, would cut the cost for businesses to hire more people and provide more consumer spending power, both of which could make a real difference.

Chuck Marr
Vice President for Federal Tax Policy