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Transition Tax to Pay for Infrastructure Isn’t a Repatriation Tax Holiday

November 13, 2014 at 1:52 PM

As policymakers mull corporate tax reform, it’s important to distinguish between two proposals that are often confused:   a repatriation tax holiday and funding infrastructure through broader corporate tax reform, such as through a transition tax on offshore profits.

A repatriation tax holiday encourages U.S. multinationals to return overseas profits to the United States by offering them a temporary, much lower U.S. tax rate on those profits.  It’s voluntary, saves money for companies, and increases deficits.

Lawmakers tried this in 2004 and it was a complete policy failure:  contrary to their promises, companies generally didn’t use the repatriated funds for more U.S. investment and job creation.  Many of the companies that lobbied most aggressively for the holiday actually announced major layoffs around the same time.

The Administration and many in Congress therefore oppose another holiday.  As an Administration spokesperson said several months ago: “The President does not support and has never supported a voluntary repatriation holiday because it would give large tax breaks to a very small number of companies that have most aggressively shifted profits, and in many cases, jobs, overseas.”

In the context of tax reform, however, one key question is what to do with multinationals’ existing foreign-held profits that have yet to be taxed in the United States.  House Ways and Means Chairman Dave Camp has proposed a mandatory transition tax on those existing profits as part of moving to a new tax regime.  The transition tax itself could raise revenues.  The concept is sound, and a transition tax would be good policy if designed carefully — in fact, a robust transition tax should be part of any responsible international tax reform.

Because the revenues from a transition tax would be one-time in nature, it would make sense to dedicate them to a burst of infrastructure investments.  This would address a glaring economic need and spur needed job creation.  It would also be more fiscally responsible than using them to pretend to “pay for” a permanent cut in the corporate tax rate — a gimmick that would increase long-run deficits.

Indeed, the President has proposed dedicating any one-time revenues generated by tax reform to infrastructure investments, not permanent corporate rate cuts.  The President alluded to that idea last week when he talked about paying for infrastructure with tax reform.  One source of temporary revenues in tax reform could be a mandatory transition tax on offshore profits.

The repatriation tax holiday is a failed idea that we should not repeat.  A transition tax to finance infrastructure as part of corporate tax reform, however, merits serious consideration.  Our paper has more on the problems with repatriation tax holidays and how a transition tax should be designed.


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