U.S. companies have huge profits sitting offshore, and some in Congress want to give them a tax break as incentive to bring nearly $1 trillion back to America. The New York Times describes the plan this way:
Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.
Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.
But the story — reflecting the agenda of the Obama White House and liberal think tanks — is skeptical about the whole idea. It highlights research that shows when companies got tax amnesty in 2005, 92% of the $312 billion brought back was used for dividends and share buybacks — not directly hiring workers, boosting salaries or purchasing equipment.
Economist Douglas Holtz-Eakin is working on a study for the U.S. Chamber of Commerce that supports a tax holiday. I chatted with him briefly this morning and here is the thrust of what he told me:
I am strong believer in a territorial tax system period, and this is a step toward fundamental tax reform. Now it’s short of fundamental tax reform in two ways: Number one, the rate’s not zero and, number two, it’s not permanent.
I would go for zero and permanent in a heartbeat if that was on the legislative agenda, but it’s not. I also think it would have substantial near-term beneficial economic impacts.
If you think of it this way: There’s over a $1 trillion out there, so let’s suppose something like $830 billion came back, which I chose specifically to match exactly what [President Obama's American Recovery and Reinvestment Act] was. Like the [ARRA], this would flow into the economy and go into corporations first, but they would then either make real purchases with it – salaries, payroll, capital investment, R&D and that would would further flow into the economy – or they would change their financial structure: share repurchases, debt reduction, dividends.
And in each case, that would flow to someone else. So on a cash-flow basis, it’s the same model. … And those balance-sheet effects would drive consumption further because of the wealth effects. That’s got to be at the heart of any response to any wealth-destroying bubble. We need pro-wealth creation policies. This is one of them.
Holtz-Eakin says his study will highlight these broader macroeconomic impacts. But his major point echoes what I wrote last March:
Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.
And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.