The wishful thinking behind a repatriation tax holiday
By Ryan McCarthy
The opinions expressed are his own.
Big U.S. multinationals have a strange sense of timing: apparently, now is the ideal time to fight for a tax holiday. The New York Times on Monday had an in-depth look at the topic of a repatriation tax holiday, with lovely charts and a helpful video detailing the myriad ways corporations cut their tax bills by stashing profits overseas. Given the clamoring about lack of demand in the economy, the deficit talks and swollen corporate cash holdings, the lobbying push seems poorly timed at best.
New York Times’ David Kocieniewski is rightly skeptical of the effort that’s currently backed by even tech titans like Apple and Google. He ferrets out an NBER study that excoriates the results of an abysmal 2004 dalliance with a repatriation tax holiday, which the study finds, led to little actual hiring and investment in the U.S. The appeal of a repatriation tax holiday is that large U.S.-based corporations could temporarily see much of their taxable income fall to 5.25 percent — the rate often paid through overseas subsidiaries — from 35 percent, the U.S. corporate rate. In theory, this windfall would temporarily prevent corporations from stashing profits overseas, bring in tax revenue, create jobs and spur investment.
And while Kocieniewski spends nearly 2,000 words on the issue, he doesn’t mention specifics of the actual legislation in play, which make the latest tax repatriation push seem just as unpromising as its predecessor.
The “Freedom to Invest Act” — a title that couldn’t be more ironic given the state of corporate coffers — makes at best only a cursory attempt to do better than its 2004 version. Introduced by Rep. Jim Brady (R-Texas), the bill has gained nine co-sponsors, including Democrats like Colorado’s Jared Polis and Tennessee’s Jim Cooper.
The key difference in the current version of the repatriation push seems to be a taxable income penalty of $25,000 that would be assessed to corporations that lay off employees within two years of the tax holiday. The penalty is meant to punish corporations that repatriate overseas profits, then simply pay that money to their shareholders and do little or no hiring.
But at a 35 percent corporate tax rate, Bloomberg noted last month, that’s a penalty of just $8,750 per worker, a sum so small that it’s not likely to have any serious affect on the decisions of our nation’s largest companies. Edward Klienbard, a professor at the USC school of law, told Bloomberg that the amount wouldn’t discourage firing. For some perspective, the penalty is about the same size as the first-time home buyer deduction, while the total amount of profit U.S. corporations stand to repatriate is estimated at $1 trillion.
Writ large at the scale of Fortune 500 companies, the repatriation tax break ledger adds up quite quickly. After the 2004 holiday, Merck and Pfizer, Kocieniewski notes, repatriated $37 billion and $13.9 billion in profits respectively.
It’s hard to believe an $8,700 tax hit would stop a $45 billion company like Merck from a laying off an employee. It’s even harder to see how large companies, without some specific requirements for how to invest repatriated profits, would suddenly decide that the time is right to invest in the American economy. After the 2004 experiment and in a much healthier economy, Merck, paid off its debt, bought back stock and fought potentially crippling drug-related lawsuits. The company’s officers, it should be noted, had a fiduciary duty to their shareholders, not to reduce the ranks of the nation’s unemployed.
The lesson from the failed 2004 repatriation holiday, of course, is one the American government has been learning over and over again of late (the bank bailouts come to mind). Flooding corporations with cash gives us no guarantees about how they’ll actually use it.