The Center's work on 'Tax Repatriation' Issues

A “repatriation tax holiday” would allow corporations to bring their overseas profits back to the United States at a fraction of the normal corporate tax rate. Proponents claim that corporations would then invest these earnings in the United States, but the evidence shows that a tax holiday would fail to boost the economy while increasing deficits and encouraging companies to locate jobs and future investments overseas.
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Recent CBPP Papers on Tax Repatriation:
– Repatriation Tax Holiday Would Increase Deficits and Push Investment Overseas
– Tax Holiday for Overseas Corporate Profits Would Increase Deficits, Fail to Boost the Economy, and Ultimately Shift More Investment and Jobs Overseas


Four Things to Look for in Chairman Camp’s Tax Reform Plan

February 25, 2014 at 5:30 am

Four questions are particularly important in evaluating the tax reform proposal that House Ways and Means Committee Chairman Dave Camp (R-MI) is expected to issue tomorrow.

1.    Does it raise needed revenue?

 
All tax reform plans raise revenue by scaling back tax expenditures (deductions, exemptions, and other preferences).  A key litmus test for the Camp plan is whether it uses any of the savings to reduce deficits instead of just to reduce tax rates.

The nation’s long-term fiscal problems will require savings from both revenue and spending.  Tax-expenditure reform is the greatest — perhaps the only — potential source of revenue savings.  If tax reform uses them entirely for tax-rate cuts, it likely will take off the table any meaningful revenue contribution to deficit reduction for the foreseeable future.

Another legitimate use of revenues is to help finance areas important for future economic growth, such as education, infrastructure, and basic research.  Key investments are being shortchanged by sequestration.  To ensure that the nation can invest adequately in its future, some revenue (along with savings in mandatory programs) will be needed, likely as part of a new budget deal to ease or eliminate sequestration.  If tax reform makes that virtually impossible by using up all politically viable tax-expenditure savings without producing any new revenue, the nation will be ill-served.

2.    Does it meet its own likely test of revenue neutrality beyond the ten-year budget window?

 
By all accounts, the Camp plan will strive to be revenue neutral.  An essential question is whether it meets that test not just over the first ten years but also over subsequent decades.  A package that uses temporary revenue gains to “pay for” permanent rate cuts would be fiscally irresponsible, regardless of whether it is revenue neutral for the first decade.

For example, the plan could rely on timing shifts that push revenue that would ordinarily come in later decades into the coming decade — or on measures whose revenue gains taper off after the first decade — so that the Joint Committee on Taxation scores it as revenue neutral for ten years, even if it would lose revenue and swell deficits and debt in later decades.

3.    Does it mitigate income inequality, or at least not exacerbate it?

 
With income inequality historically high, an important question is whether the Camp plan leans against rising inequality by making the tax code more progressive — or, at a minimum, maintains the tax code’s progressivity.

One issue that will help answer this question is whether the plan makes permanent the recent improvements in two key tax credits for low- and moderate-income workers, the Child Tax Credit and Earned Income Tax Credit (EITC).  A related question is whether the plan strengthens the EITC for low-income workers not raising children — the sole group of workers that the federal tax system taxes into, or deeper into, poverty.

Also important are the plan’s effects on progressivity beyond the first ten years.  A plan that couples permanent rate cuts with temporary revenue increases could maintain the tax code’s progressivity in the first ten years but worsen it after that.

4.    Does it both ask corporations to contribute to deficit reduction and reduce the tax code’s tilt in favor of overseas investment?

 
Given the cuts that policymakers are making or considering in virtually every spending category — from domestic discretionary spending to Medicare to defense —- corporate tax reform should also contribute to long-term deficit reduction by raising corporate revenues.  A related test is whether the Camp plan reduces the tax code’s tilt in favor of overseas profit-shifting and investment, which would risk reducing wages at home.

A First Look at the Baucus Draft on International Corporate Tax Reform

November 20, 2013 at 12:00 pm

Yesterday’s staff discussion draft on international corporate tax reform from Senate Finance Committee Chair Max Baucus recognizes the importance of tax reform’s budgetary impact over the long term, not just in the first decade.  It also recognizes that the tax code gives multinational corporations an incentive to move profits and investment offshore, and it narrows or closes several ill-conceived and heavily exploited tax loopholes.  It is distinctly superior to various ideas that various corporate lobbying coalitions are circulating and to a draft proposal that House Ways and Means Committee chair Dave Camp circulated earlier this year.

At the same time, while the draft takes important steps to address the tilt in favor of foreign profits, it leaves some foreign profits on active business in a more favorable tax position than domestic investments and profits.

First, let’s consider the fiscal impact.  The Baucus draft states that it is “intended to be revenue-neutral in the long-term” (emphasis added).

On the one hand, the target of revenue neutrality is disappointing.  If international corporate tax reform is revenue neutral over the long term, any savings from closing loopholes that encourage multinationals to shift profits and investments offshore wouldn’t contribute to long-term deficit reduction.  Multinationals would make no contribution to that, even as others are asked (sooner or later) to sacrifice.

On the other hand, the draft lays down an important standard:  policymakers must measure tax reform’s fiscal effects over the long term, not just over the next ten years.  The draft calls, for example, for a one-time, 20 percent tax rate on corporate profits now held offshore (in part to avoid U.S. taxes), but it doesn’t use these one-time revenues to construct a tax plan that is revenue-neutral for the initial ten years but loses revenues over time.  The draft commendably avoids timing shifts and temporary revenues that can make a plan look fiscally responsible (when only the first ten years are considered) when, in fact, a plan might be anything but responsible over the longer run.

In addition, the draft wisely doesn’t adopt a cartoon version of “territorial taxation,” in which multinationals would pay little or no taxes on overseas profits.  It includes some important provisions to address some of the most egregious loopholes and to reduce incentives for corporations to shift manufacturing offshore.  Importantly, it proposes an effective tax rate floor — that is, a minimum tax — on U.S. multinationals that currently pursue the most aggressive tax avoidance strategies.  That will help address the current lopsided tilt toward foreign investments and profits.

Still, the draft does not fully correct for that tilt.  That’s because the draft still allows some foreign profits to be taxed at a discounted tax rate compared to domestic profits.  Some foreign profits would be taxed at either 60 percent or 80 percent of the U.S. corporate tax rate — a proposition that surely would prove difficult for any average U.S. taxpayer to understand.

Repatriation Tax Holiday Can’t “Pay for” Canceling Sequestration — Or Anything Else

October 29, 2013 at 1:51 pm

Rep. Tom Cole (R-OK), a member of the conference committee negotiating a 2014 budget framework, said recently that policymakers could raise additional revenue to help pay for canceling the sequestration budget cuts through “repatriation of stranded profits.”  That seems to refer to a “repatriation tax holiday” — allowing multinational corporations to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate.

The reality is that a repatriation tax holiday can’t pay for anything because it would cost billions of dollars a year, as Congress’s Joint Committee on Taxation (JCT) has found.

JCT analyzed a repatriation holiday proposal in 2011 and found that while it would boost revenues initially, as companies rushed to take advantage of the temporary low rate, it would bleed revenues for years and decades after that (see graph).  Even over the first decade, a repatriation holiday would cost about $79 billion, according to JCT.

As JCT explained, the single biggest reason a repatriation tax holiday would be so costly is that it would encourage companies to shift more profits and investments overseas in anticipation of more tax holidays, thus avoiding taxes in the meantime.

Tax Holiday Would Be Bad Addition to Budget Agreement

October 12, 2013 at 12:15 pm

As part of ongoing budget talks, Senate Republicans have reportedly floated the idea of “paying for” repealing at least part of sequestration with a repatriation tax holiday — that is, allowing multinational corporations to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate.  But a repatriation tax holiday can’t pay for anything because it would cost billions of dollars a year, as Congress’s Joint Committee on Taxation (JCT) has found. And the last time that Congress tried this policy, it failed miserably to deliver any economic benefits.

  • A costly corporate tax cut. JCT analyzed a repatriation holiday proposal in 2011 and found that while it would boost revenues initially, as companies rushed to take advantage of the temporary low rate, it would bleed revenues for years and decades after that (see graph).  Even over the first decade, a repatriation holiday would cost about $79 billion, according to JCT.

    As JCT explained, the single biggest reason a repatriation tax holiday would be so costly is that it would encourage companies to shift more profits and investments overseas in anticipation of more tax holidays.

    Senator Lindsey Graham (R-SC), however, reportedly said yesterday that “[i]t’s just stupid” that official estimates show repatriation to lose significant revenue and suggested changing congressional “scoringkeeping” rules in order to ignore these costs.  It is appalling that amidst current concerns about the nation’s long-term debt, a policymaker would propose to ignore inconvenient estimates produced by non-partisan congressional analysts and substitute made-up “facts.”

  • A proven policy failure. Congress tried a repatriation holiday in 2004, with companies claiming that they would use the repatriated cash to invest in jobs.  It proved an embarrassing failure.  Independent studies show that it didn’t boost jobs or the economy; in fact, many of the companies that got the biggest tax breaks under the holiday then laid off thousands of workers.

    A new holiday would once again encourage companies to shift more and more profits and investments overseas, keep the money there, and wait until a vulnerable political moment appears to press for a new holiday.  That’s why Congress, when it enacted the 2004 holiday, said that it should be a one-time-only deal.  Another holiday would give the biggest rewards to the companies that most aggressively shifted their profits and investments offshore after the 2004 holiday — and lobbied hard for a new one.  A repatriation holiday is a mistake that policymakers shouldn’t repeat.

The Trickle-Down Economics of Tax Cuts for Multinationals’ Foreign Profits

June 19, 2013 at 10:22 am

Representative Jim McDermott (D-WA) asked a witness at a Ways and Means hearing last week how the United States would benefit if policymakers cut taxes on U.S. multinational corporations’ overseas profits to encourage them to bring the profits to the U.S.

The witness — Paul Oosterhuis, an international and corporate tax lawyer whose clients include large multinationals — responded:

Oosterhuis:  To my mind, it’s largely their shareholders.

Rep. McDermott:  Oh so it’s the shareholders.  Not the workers, not the economy of the country, it’s only the shareholders.  We’re having a shareholder sweepstakes.

Oosterhuis:  I think it’s largely the shareholders, yes, because a lot of that — there’s two effects.  One would be if the money comes back, it would be used to buy back stock, pay dividends in the first instance that are not being paid now and I think that’s healthy, it gets the money in circulation and that will help the economy indirectly.  The second aspect is that today, because of the trapped cash, companies have more of an incentive to buy assets outside the U.S. than to buy assets inside the U.S.  It has to help with that bias.

These arguments are pure trickle-down theory:  only shareholders will receive a direct benefit; everyone else has to hope that the gains will trickle out into the wider economy.

Multinationals made much bolder predictions in 2004 when they persuaded policymakers to adopt a temporary “tax holiday” on repatriated profits.  At that time, companies promised that they’d use the cash to directly boost hiring and investment in the United States.  Instead, they paid the bulk of it to their shareholders while cutting tens of thousands of jobs.

But these new trickle-down arguments are just as unconvincing.  In reality, cutting taxes on overseas profits — whether through another tax holiday or adoption of a territorial tax system — would make it more attractive for multinationals to shift profits and investments offshore.  That would leave less capital in the United States, weakening the economy and reducing the wages of U.S. workers.

The lesson here is that, when it comes to corporate tax reform, the interests of U.S. workers are not necessarily the same as those of U.S. multinational corporations.  And workers’ interests deserve consideration, too.