Policy wonks on left and right don’t agree on much, but they do concur on this: Letting U.S. multinationals bring home profits that were earned abroad won’t boost employment.
Here’s what the conservative Heritage Foundation, a staunch advocate for reducing corporate taxes, had to say this week in assessing the potential impact of a so-called “tax holiday” under consideration in Washington:
The current proposal would cut taxes, which is generally a good thing, but if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation. The repatriation holiday would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained today.
U.S. taxpayers provided a huge subsidy to corporations that destroyed jobs. Following a tax holiday on repatriated foreign earnings in 2004, 58 corporations that benefited from the holiday slashed a total of nearly 600,000 jobs. These 58 giant corporations accounted for nearly 70 percent of the total repatriated funds and collectively saved an estimated $64 billion from what they otherwise would have owed in taxes.
Congress should not make the same mistake again. If Congress votes another “one-time” tax holiday on repatriated offshore earnings, on the same terms as the 2004 tax holiday, the firms that have eliminated nearly 600,000 jobs since the last holiday could reap as much as $200 billion in savings over the taxes they otherwise would have to pay under current tax rules.
Confederacy of dunces?
The scare quotes in “one-time” highlights the moral hazard inherent in tax holidays. After all, if corporate leaders know that every few years Congress is going to slash their taxes on foreign earnings, then they have a strong incentive to keep that money safely overseas. It also encourages firms to use tax trickery to dress up profits from U.S. sales as foreign profits. A year before the 2004 holiday, U.S. companies had $229 billion in untaxed offshore profits, IPS says. By 2010, that figure had more than tripled, to $696 billion.
So it’s unanimous — another tax holiday wouldn’t spur investment or create jobs, but it would cost the U.S. government billions of dollars in tax revenue and spur companies already sitting on more than $1 trillion in cash to divert even more money to tax havens.
Put a spike in it, right? If only stupidity died that easily. On Capitol Hill, bipartisan support appears to be growing for legislation under which U.S. companies next year could repatriate foreign profits at an effective tax rate of 8.75 percent, rather than the top statutory rate of 35 percent.
Sens. John McCain, R-Ariz., and Kay Hagan, D.-N.C., who are sponsoring the measure, claim the bill would avoid the errors made during the 2004 holiday by offering even bigger tax breaks for companies that expanded their payrolls. It would also penalize companies that laid off workers after returning overseas earnings, requiring firms to add $75,000 to their taxable income for every eliminated job.
I’m a loser, baby
Big corporations that are lobbying for another vacation from paying taxes, including Apple (AAPL), Google (GOOG), Duke Energy(DUK), Microsoft (MSFT), Oracle (ORCL) and Pfizer (PFE), are delighted with the McCain-Hagan proposal. WinAmerica, a group formed to push for the tax breaks (and whose staff consists mostly of former legislative staffers and other political pros with ties to Congress), calls the bill a “critical step forward in the effort to jump-start our economic recovery.”
Uh, huh. Let us climb out on a very short limb: U.S. multinationals aren’t putting off hiring and scaling back investment because their taxes are too high. As a percentage of GDP, corporate taxes in this country are among the lowest in the industrialized world. Such companies also base decisions on where to grow not by consulting a tax table, but by looking at what part of the globe has the best business opportunities.
As a result, tweaking their tax incentives will do strictly nothing to induce them to expand here at home. A tax holiday is a winner for members of WinAmerica, but for everyone else the idea is a big loser.