Jun 30, 2011 at 9:53 pm
It seems like bad ideas just keep gaining strength these days.
I’m talking about the tax repatriation holiday I wrote about last week, a great way to give a fat tax break to multinational corporations while adding $80 billion to the deficit over 10 years.
To remind you, this is where we let American companies with overseas earnings bring those earnings back at a sharply reduced tax rate. As Chuck Marr and Brian Highsmith summarize, it was a total flop the last time we tried it.
“A tax holiday enacted in 2004 failed to 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 benefits from the tax holiday and passed them on to shareholders.”
So why does this idea have any oxygen at all right now? Because some congressional Democrats who would normally run from it are intrigued by an idea floated to use some of the money that comes back from abroad to capitalize an infrastructure bank.
I like the infrastructure bank idea—it’s a cool way to make smarter investment decisions. But here’s why this is the wrong way to go about funding it.
–There is no “money that comes back from abroad.” The graph below shows the real story on the “proceeds” from the tax break. The Treasury collects some money up front and then starts losing big time. Why?
–Because if companies with “overseas earnings” (these quotes are important, as I’ll explain next) learn that they can depend on a big tax break every few years, they’ll shift more and more earnings and jobs and investments abroad. To amplify this incentive has to be one of the craziest things we could in an economy that desperately needs those earnings, jobs, and investments here at home.
–Here’s a new kicker I learned from my CBPP colleague Brian Highsmith today, based on some excellent reporting here. Much of these “overseas earnings” actually start here—they’re shifted abroad to take advantage of lower tax rates and to defer them in hopes of…you guessed it!…another fun repatriation holiday.
International taxation expert Ed Kleinbard has this right:
“Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues? Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies — where their customers and key employees are in reality located — to tax havens.”
–But if we don’t give them what they want, won’t they just defer ever more earnings?—at least this way they’ll bring some of them back. I don’t buy it. Again, it’s really the reverse—this just proves to them that they should start aggressively deferring again in preparation for the next holiday.
But let’s say they do bring back fewer earnings than they otherwise would. That’s not necessarily a bad deal for the Treasury, which would be taxing a smaller amount at a much higher rate. If the rate differential is 25% versus 5% (ballpark for what they’d pay without and with the holiday), they’d have to bring back five times less earnings for the Treas to lose on this. Based on historical revenue flows, that’s very unlikely.
–And finally, basic fairness. Why provide a massive windfall and give a big competitive advantage to the very companies that have already shown that they can handily produce abroad, or at least make it look like they can, ala the Bloomberg link above? Except for the phony tax-haven stuff, I have nothing against the multinationals…hey, I get that it’s a global economy…Tom Freidman and all that. But can someone give me one good reason to favor them over our domestic producers?!?
Believe me, I know how hard it is to find the money to fund good ideas like the I-bank, and I understand why policy makers who’ve tried to move that idea for years might view this as a bright opportunity in an otherwise dark time.
But there’s just gotta be a better way. Maybe something off of this list, for example (hint: “I’ll take ‘international tax reform’ for $129 billion”).
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