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.
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

Transition Tax to Pay for Infrastructure Isn’t a Repatriation Tax Holiday

November 13, 2014 at 1:52 pm

As policymakers mull corporate tax reform, it’s important to distinguish between two proposals that are often confused:   a repatriation tax holiday and funding infrastructure through broader corporate tax reform, such as through a transition tax on offshore profits.

A repatriation tax holiday encourages U.S. multinationals to return overseas profits to the United States by offering them a temporary, much lower U.S. tax rate on those profits.  It’s voluntary, saves money for companies, and increases deficits.

Lawmakers tried this in 2004 and it was a complete policy failure:  contrary to their promises, companies generally didn’t use the repatriated funds for more U.S. investment and job creation.  Many of the companies that lobbied most aggressively for the holiday actually announced major layoffs around the same time.

The Administration and many in Congress therefore oppose another holiday.  As an Administration spokesperson said several months ago: “The President does not support and has never supported a voluntary repatriation holiday because it would give large tax breaks to a very small number of companies that have most aggressively shifted profits, and in many cases, jobs, overseas.”

In the context of tax reform, however, one key question is what to do with multinationals’ existing foreign-held profits that have yet to be taxed in the United States.  House Ways and Means Chairman Dave Camp has proposed a mandatory transition tax on those existing profits as part of moving to a new tax regime.  The transition tax itself could raise revenues.  The concept is sound, and a transition tax would be good policy if designed carefully — in fact, a robust transition tax should be part of any responsible international tax reform.

Because the revenues from a transition tax would be one-time in nature, it would make sense to dedicate them to a burst of infrastructure investments.  This would address a glaring economic need and spur needed job creation.  It would also be more fiscally responsible than using them to pretend to “pay for” a permanent cut in the corporate tax rate — a gimmick that would increase long-run deficits.

Indeed, the President has proposed dedicating any one-time revenues generated by tax reform to infrastructure investments, not permanent corporate rate cuts.  The President alluded to that idea last week when he talked about paying for infrastructure with tax reform.  One source of temporary revenues in tax reform could be a mandatory transition tax on offshore profits.

The repatriation tax holiday is a failed idea that we should not repeat.  A transition tax to finance infrastructure as part of corporate tax reform, however, merits serious consideration.  Our paper has more on the problems with repatriation tax holidays and how a transition tax should be designed.

Repatriation Tax Holiday Can’t “Pay for” Anything, New JCT Figures Show

June 9, 2014 at 5:09 pm

Various policymakers have proposed a “repatriation tax holiday,” which allows multinational corporations to bring profits they hold overseas back to the United States at a temporary, vastly reduced tax rate, to help “pay for” infrastructure, including addressing shortfalls in the Highway Trust Fund.  In reality, however, a repatriation tax holiday can’t pay for anything because it would cost billions of dollars a year, as a new analysis by Congress’s Joint Committee on Taxation (JCT) confirms.

A repatriation tax holiday would boost revenues in the first couple of years, as companies rushed to take advantage of the temporary low rate.  But it would bleed revenues for years and decades after that (see graph).  Even over the first decade, a repatriation holiday would cost $96 billion, according to JCT.

As JCT explains, the single biggest reason why a second repatriation tax holiday (policymakers enacted one in 2004) 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:

A second repatriation holiday may be interpreted by firms as a signal that such holidays will become a regular part of the tax system, thereby increasing the incentives to retain earnings overseas rather than repatriating those earnings and to locate more income and investment overseas.

That’s precisely why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time-only event and should not be repeated.  (For more, see our 2011 analysis, which we’re updating.)

This all should sound familiar to policymakers; previous JCT estimates have shown that a repatriation tax holiday would cost revenue, not raise it.  The new JCT estimate shows that this basic fact hasn’t changed.

Congress Should Promptly Enact Legislation to Help Close Tax-Driven Corporate “Inversions” Loophole

May 21, 2014 at 2:30 pm

U.S. drug giant Pfizer’s recent effort to merge with much smaller United Kingdom-based AstraZeneca, and then convert itself into a “U.K. company” and avoid U.S. corporate taxes — even though its U.S. shareholders would continue to own a majority in the merged company — highlighted a gaping hole in current corporate tax law.  With that in mind, Senator Carl Levin (D-MI) and 13 Senate co-sponsors, and Representative Sander Levin (D-MI) and nine House co-sponsors, introduced companion bills yesterday to halt a possible renewed spate of such tax-driven corporate “inversions,” whereby corporations shift their headquarters overseas to avoid paying U.S. tax on their foreign earnings.

Congress should approve these bills promptly.  Inaction would reward aggressive tax avoidance in at least two ways, because the merged company could:

  1. More easily book its U.S. profits in tax havens.  Even though Pfizer would be headquartered in the U.K., the United States would — in theory — still be able to tax the merged company’s earnings from its U.S. operations.  But Pfizer appears to be expert at using profit-shifting techniques to book profits offshore for tax purposes, even though a large share of its activity and sales is in the United States.  “Over the last half decade, Pfizer has put all of its profits outside the United States despite high prices in the United States, more than 40 percent of its sales in the United States, and a heavy concentration of research in the United States,” a 2013 analysis by Tax Analysts’ Martin A. Sullivan noted.  A Congressional Research Service report on the proposed merger concluded that a foreign headquarters could make it even easier for Pfizer to shift its profits out of the United States.
  2. Avoid ever paying U.S. tax on Pfizer’s “offshore” cash.  In part because Pfizer has been so good at booking its profits outside of the United States, its offshore subsidiaries are currently sitting on $73 billion of earnings.  Under current law, Pfizer can delay paying U.S. tax on those earnings until it brings them back to the United States (by declaring a dividend to shareholders, for example).  But if Pfizer merges with AstraZeneca, it can avoid ever paying U.S. tax on the earnings it made when it was a U.S. company.  While domestic companies pay taxes every year, a multinational company like Pfizer would be able to defer taxes for years and then change corporate residence (while not changing control) and, thereby, wipe out its U.S. tax liability.

Congress enacted legislation in 2004 to deter U.S corporations from moving their headquarters to tax havens to reap such tax avoidance benefits.  These “anti-inversion” rules, however, were too weak, as the intended Pfizer merger shows.  The bills introduced yesterday reflect a proposal in the President’s budget to strengthen the tax rules for a U.S. company that has merged with a foreign company.  The proposal includes a straightforward rule that the merged company couldn’t generally be treated as a foreign company for tax purposes if the shareholders of the U.S. company continue to control it.

The bills introduced yesterday would help prevent U.S. companies from using inversions to reap the benefits of aggressive profit shifting by expatriating, and the House and Senate should adopt them promptly.  Waiting for broader tax reform legislation down the road would only invite more tax avoidance-driven corporate exits and a fierce lobbying campaign to protect the loophole.

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.