The Fantasy that Tax Repatriation Can Pay for Highways (or anything else…)

June 11th, 2014 at 8:20 am

Like a bad penny, this tax repatriation idea just keeps coming back.

You know, the one where you offer a bribe to multinational corporations in the form of a big tax cut to “repatriate” their foreign earnings.  In this case, members on both sides of the aisle are conspiring to use this gimmick to replenish the nearly exhausted highway trust fund.

My CBPP colleagues have pointed out many times over why this doesn’t work, but simply put: repatriation can’t pay for anything because it’s a big, fat revenue loser.  The figure below shows the score of such a plan by the bi-partisan Joint Tax Committee.  The first two bars show something like $20 billion initially flowing into the Treasury as foreign earnings are brought home at an 85% discount on the 35% corporate tax rate (that’s a tax rate around 5%: (1-.85)*.35).

But after that, the temporary tax cut starts losing revenue, and for an interesting reason: multinationals ramp up their deferrals of  foreign earnings (holding them overseas) in advance of the next tax holiday.  The “holiday” terminology is interesting, btw, because a bunch of these alleged revenues have already been on holiday, sunning themselves in Caribbean tax havens.  From the second link above:

The evidence indicates that a significant share of the profits that multinational corporations book in low-tax foreign jurisdictions is, in economic terms, attributable to domestic economic activity — that these “overseas profits” were, through complicated accounting maneuvers, shifted overseas on paper specifically to avoid U.S. corporate taxes.  A valuable new report…shows that, during the first repatriation holiday in 2004, seven of the nineteen surveyed corporations received over 90 percent of their repatriations from tax haven countries.  A second holiday for repatriated profits would enable firms that have avoided U.S. taxes in this way to bring sheltered earnings back at a greatly reduced tax rate — encouraging them and other firms to shift more income earned from investments in the United States and other non-low-tax countries to offshore tax havens.

By 2024, the Treasury is out at cumulative total of $96 billion.

I’m gonna go out on a limb here and assume you agree that you can’t pay for something with something else that loses almost $100 billion in revenues.  Yet, clearly our transportation infrastructure needs some serious upkeep, and just as clearly, we really don’t want states to start laying off construction workers (from the NYT):

…by the week of July 18, the [highway] trust fund’s nest egg would dip below $4 billion, the “prudent balance” trigger that would force the Department of Transportation to tell states to begin slowing construction projects. By next year, every cent of fuel tax receipts would have to go to projects already underway, blocking any new repair or construction projects, and possibly slowing an already incremental economic recovery.

That line about fuel receipts refers to the funding source of the highway trust fund: the 18.4 cent/gallon federal gas tax, about 85% of which is spent on highways.  That tax has been frozen at that level for over twenty years, with no adjustment for either inflation or the improved mileage of the fleet of cars and trucks on the road.

This nice bit of work from ITEP suggests that such adjustments, had they begun in 1997, would by now have led to increase of just under 11 cents, with 80% of that coming from the price increases of building materials and the rest from improved mileage.  They calculate that by 2013, this phase-in would have added about $4.70/month to the spending at the pump by the average driver.

Here’s the thing: to believe you can pay for essential public goods by cutting taxes on multinational corporations is a fantasy that no responsible grownup should maintain.  Whether it’s roads or anything else, we cannot pay for something with a tax cut that loses $100 billion over ten years.  I know I’m not running for office but how radical is it to assert that if we want infrastructure, we have to pay for it?  Raising the gas tax is the obvious solution, but if you want to find the revenues somewhere else, be my guest.  Just don’t kid yourself that a “holiday” for overseas corporate profits will do the trick.




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12 comments in reply to "The Fantasy that Tax Repatriation Can Pay for Highways (or anything else…)"

  1. Smith says:

    Why is the error in favoring the plan framed as one of ignorance (not knowing the downside), or ideology (favoring low taxes), or expedience (willingness to sacrifice the future), instead of corruption (selling votes for campaign contributions)? Commute 30 miles to work, 60 round trip, 3 gallons/day, 250 days a year, 750 gallons * 15 cent = $75/year or $12/month Drive 20,000miles/year = 1,000 gallons $150/year. Two cars = $300/year
    Your mileage may vary.

    134 Billion gallons * 15 cents = $20 billion/year

    What is left undone are tracking
    a) the forces opposed to gasoline tax
    b) an order of magnitude greater, the forces seeking tax repatriation
    c) a political figure willing to make use of the information, thereby exposing those in their own party

    Although $20 billion is only .1% of the $17 trillion economy, it can have a tremendous impact on politics. A $1 billion investment brings a 20 fold return.
    $1 billion/535 members of congress = $2 million/congressman
    A lot of the info can be found here, but it warrants a full expose (with the French accent):

  2. Gene says:

    Nice lesson in opportunity cost—how many “decificient/falling down” bridges that pose imminent danger to the traveling public could be fixed with $363 mllion dollars? I am guessing quite a few.


    You only need to read the first few projects to get the idea as to why we can’t have nice things.

    I would suggest more focus is needed as opposed to more money. Couldn’t we try THAT first? Rhetorical question…

  3. Robert Buttons says:

    End our confiscatory 35% corporate income tax and the money won’t leave to begin with.

  4. Miriam J. Ramirez MD says:

    The reason for the sad financial situation of Puerto Rico is precisely this CORPORATE TX BENEFIT
    Puerto Rico a US Territory with US citizens for over 100 years is the largest victim of Corporate Greed. Greedy politicians in Puerto Rico, a US Territory of American citizens, in alliance with interested sectors in the island, including corporate lobbyists, CFC’s, the local opposition parties, workers unions, local Banks, etc. have lobbied Congress for decades to obtain tax exempt privileges for US Corporations who do business in Puerto Rico. This has consisted in obtaining legislation that have created IRS Codes that define Puerto Rico as a foreign country for their tax benefit purposes. CFC (Controlled Foreign Corporations) does not mean they are foreign, it means Puerto Rico is foreign! This is a legal violation of the US Constitution Territorial Clause.

    Puerto Rico is right at the center of this storm. Our US Territory is their top choice for corporate money laundering. Many in Puerto Rico have been led to believe these corporate tax breaks are the only solution to our stagnant economy. However, these tax breaks have been around for over 60 years and we still continue with high unemployment and serious social problems which have escalated in high crime statistics, comparable to a war zone. It has also contributed to the economic debacle hitting the US taxpayer and workers, by taking jobs away from the US, increasing unemployment and then obtaining tax benefits to bring the money home under the false pretense of helping the US economy. Over the decades, this has not resulted in benefits for our island or our people. It has created a filthy rich governing elite class which has enjoyed these privileges, while the rest of the 3.5 millions of Puerto Ricans live under the US poverty standards and with an unemployment rate of over 18%.

    3.5 million US citizens live in Puerto Rico and 4.5 million have already opted to abandon ship and relocate to the other States of the Union, the most recent ones, our most talented professionals. Whenever the people put pressure for a process of self determination, millions of dollars appear out of nowhere to campaign against statehood, since it will be the death knoll for this scam.

    As we speak, the Government of Puerto Rico, a US Territory of American citizens, in a shameful historical move, in cohorts with interested sectors in the island, including Corporate lobbyists, CFC’s, the local opposition party, workers unions, etc., lobby Congress for a new amendment H.R.3020, to the Federal Internal Revenue Code which will give them more tax sparing benefits and continue to code Puerto Rico, a USA territory, as a foreign country so it can continue to be the “American-Foreign” offshore tax haven for multinational corporations and Corporate Welfare. This bill will scam the US Treasury for billions of dollars. It will not help the US economy, and will not create jobs for Americans. Not in Puerto Rico and not in the 50 states.

    The proposed amendment does not provide a SPECIFIC requirement to create jobs with the repatriated profits. Without this provision, the companies will use the funds to increase dividends and buy back their battered stocks, like they did in 2004. The junket of business and political leaders from PR going to DC will only move the economy in hotels and restaurants in DC while they visit, but hopefully will not convince the staff in Congress and US Treasury, who know how the companies make job and investment decisions.

    The Bill is a major strategic blunder. Puerto Rico should propose the creation in PR of a federal island-wide enterprise zone, and the full incorporation of PR into the federal tax system. A federal enterprise zone in PR will provide tax incentives linked to job creation that Congress and the US Treasury can support.
    Miriam J. Ramirez MD

    • Robert Buttons says:

      Puerto Rico should be, like Singapore, MASSIVELY wealthy based on its proximity to the US and its tax advantages. Unfortunately, PR rejected, unlike Singapore, free markets and chose big govt. Further, PR’s artificially elevated minimum wage (matching the mainland) has created a 30% youth unemployment rate. Now debt is crushing the economy, but we are told more debt is good!

      Government fiat does not create sustainable jobs. It simply robs the private sector of capital.

  5. Tom in MN says:

    They should put the rate on returning profits up to 100% starting in a year. Then bringing the money from overseas at the current rate will look like a deal. No problems with this losing money in later years.