My experience in policy making has led me to try to strictly obey a couple of basic precepts. First, keep it simple. Unintended consequences abound, and the more tweaks you have to build in to get the policy to do what you really want it to do, the more likely something will go wrong.
Second, it’s better not to pass a bad policy than to try to make it a good one. Why not? See rule #1 above.
These caveats come to mind in thinking about the tax repatriation holiday that’s getting some buzz these days. This is where you let multinational corporations who’ve been “deferring” taxes they owe to the Treasury—holding them overseas—get a time-limited break to bring them back (to “repatriate” them) at a much reduced rate (5%!!). See here and here.
The core of the critique is that while the corporations who take advantage of this tax break claim that they’ll invest the tax windfall and create more jobs, the evidence shows otherwise (we tried this before, back in 2004). Over to my CBPP colleagues Chuck Marr and Brian Highsmith:
“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.
- Repeating the tax holiday would increase incentives to shift income overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future. That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.
- The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious. U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959. The ten companies lobbying hardest for a new tax holiday alone have at least $47 billion in cash and other liquid assets that could be used for domestic investments — without triggering additional tax liability.
- Some of the biggest beneficiaries of a tax holiday would be firms that have aggressively shifted income overseas. Companies in the technology and pharmaceutical industries have been particularly aggressive in shifting income abroad because they rely on intellectual property, which is relatively easy to shift to other countries as a tax avoidance strategy. Half of all repatriations from the 2004 tax holiday came from companies in these two sectors alone. The same corporations and sectors would stand to benefit disproportionately — and enormously — from a second tax holiday.”
Lately, some folks have suggested ways to make this bad idea work better by assigning any revenues from it to infrastructure projects or by making receipt of the windfall conditional on new hires. Note that this is already highly dubious because the damn thing scores as adding $80 billion to the deficit over 10 years—so, like, where’s the “new revenue?”
But it’s also the case that those ideas violate both of the policy rules. I can easily imagine legislation that ends up essentially saying, “OK—for every gazillion dollars you repatriate, you have to create one part time job that has to last at least 20 minutes.” Plus, why do we want a hiring credit that only applies to multinationals that squirrel away their profits overseas? For that matter, why do we want to advantage these firms relative to our wholly domestic ones?? Why, I ask you??!!
Nor can you fund infrastructure projects, or capitalize an infrastructure bank, as some have suggested, on a program that costs the Treasury billions. You wanna to build infrastructure? Me too. Raise the money and let’s do it.
I’ve got a good, simple idea that solves all of the above, at it’s one we proposed during my time in the Obama Administration. No more deferral of taxes on overseas profits. Boom!…problem solved.
Of course repatriating corporate money at deeply discounted tax rates is a bad idea. The last repatriation failed to increase jobs and it created what economists call “Moral Hazard.” That is – it created an incentive for corporations to avoid US taxes by keeping profits overseas and expecting there would be another tax holiday for them.
But, as usual, when it comes to the right wing, “Moral Hazard” is an excellent reason to do nothing about our housing catastrophe because that would help the little guy. “Moral Hazard” is never considered when it comes to the rich and powerful.
The tax holiday is a terrible idea. All it does is encourage that kind of behavior. This is one of those don’t be a sucker situations…. I fully agree with this: “No more deferral of taxes on overseas profits.”
Here are some thoughts on the hearing.
I thought the first three speakers were quite persuasive. The third was moving. I felt really bad for her. She also made a strong case because as she said her family did everything right.
Especially when people are not talking to others face to face or hearing their stories, they can subconsciously or consciously find “reasons” for their situation. (It’s a blame the victim mentality.) They weren’t good at their jobs; that’s why they lost them. They don’t work hard enough. They have bad spending habits. They bought more house than they could afford. They don’t want to get more education. They are lazy. I am not like that.
I have even seen people (who vote Republican) do this and then turn around and make excuses for CEO compensation and the like, even when their firms are failing. There is this idea that if it happens, it does so for a justified reason. The reward or punishment is merited or perhaps God willed it. They ignore chance and circumstance.
I think one of the changes that need to be made is the interest rate on student loans. The government is the main (if not sole) provider of student loans currently yet rates are too high. The Treasury can borrow at 3% or something like that, yet the average student with good credit is paying 7% to 9%. I don’t think that kind of “risk premia” is justified. They should offer consolidation loans as happened during the Greenspan era so students can lower interest rates to 5% or less. The government will still make money and it will very much help the deleveraging process.
I used to think that it was too complicated to help homeowners since securitization had sliced up individual mortgages. I still haven’t figured out if this is true or not, but I don’t feel like anyone tried too hard to really find out. (Maybe they did, and I missed it.) I like your renting idea. I think the government can set things up so that they make a bit of money and support the middle class.
It’s important that the government does not lose money because people are inherently jealous, and it will trigger a “my taxes are going to support your profligate ways” reaction that I alluded to above. It’s important to emphasis that the government makes money while still helping its citizens that support the government – a win/win for everyone that will get the economy back on track, etc. The selling of these ideas is critical. Republicans can never be allowed to dominate the conversation because they pervert the most practical ideas with their class warfare/handout routine.
Those are the two main areas: mortgages and student loans that would help debt-laden Americans considerably, and anything that speeds up the deleveraging process will help the whole country.
(Another idea, but far more controversial, is that the government creates a national bank and offers credit card consolidation…. I know this will go nowhere, but I still think we should have a national bank with branches at post offices, like they have in France.)
Corporations that favor tax repatriation stand to make billions on this and will pay politicians millions in campaign contributions, future jobs, etc. How much are you willing to pay politicians to stop them?
Another example of things that aren’t illegal, but should be. I’d suggest that companies that want to hold their profits overseas can do so, but they lose all access to our legal system. They can receive justice through the legal systems of the countries in which they’re holding their untaxed loot.
Public infrastructure is a common good and must be financed as such. We can borrow financing models from the private sector but we must look more creatively for solutions.
The first and most obvious place to look for public funding is from the defense budget. Diverting part of the money spent on wars to develop alternative energy infrastructure would allow us to begin to break our dependence on foreign oil.
This crushing addiction has kept us involved in wars and nation-building in Iraq, Afghanistan and Libya, among other places.
The other place to look for infrastructure funding is the $1 trillion of profits U.S. corporations are storing overseas. American companies are lobbying Congress to repatriate profits earned in overseas subsidiaries at tax rates as low as 5%.
Perhaps Congress should legislate a compromise and tax half of returning profits at 0% if corporations loaned the other half of profits to a national infrastructure bank for a term of 10 years and an annual interest rate of 5%.
The infrastructure bank would capitalize new high-speed transit, offshore wind power, solar power arrays and new energy transmission grids. These projects once built would cash flow and allow repayment of multinationals repatriated profits.
This scheme would remove responsibility from corps to dedicate profits to job creation. We could fund projects on the scale of the Erie Canal, Hoover Dam and transcontinental railway.
The shortcoming I see to the proposal is finding someone strong and visionary enough to pull it off. Surely though there is an American who would raise to the challenge.
So not only a tax holiday, but actually paying companies extra to bring money back? Sounds like making a bad idea worse to me.
What Virgil said… 8^)
The corporations don’t need that money stored overseas? Squeeze ’em until they do.
I can think of a way to make it a good idea: reverse it. Firms that bring their cash back today only pay normal corporate income tax, but repatriated funds will, starting in 201x be taxed an additional 5% penalty. If they want money here (which they clearly do) then they bring it back fast to avoid the penalty.
Abolish the corporate tax by making distributions deductible. Also tax ALL income at the same rate (tax capital gains as income).
This puts equity on the same footing as debt, so less need for debt financing (more resilience in bad times). It also removes the main reasons for share buy-backs and other financial manipulations that enriches Wall Street. Joe Blow’s 401K account on Main Street would see a bigger share of profits instead of Wall Street.
It would raise the same amount of revenue, as the current corporate tax ($300B), but would greatly benefit us mortals with 401K accounts (rules that helps the little guy on Main Street vs. rules that help the big guy on Wall Street). Not to mention simplification of the tax code. Also no need for expensive corporate tax-attorneys.
Jen Sorensen did a good Comic strip on the topic: