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


Paul-Boxer Repatriation Tax Holiday May Hide True Long-Term Costs

February 5, 2015 at 12:44 pm

Explaining why the “repatriation tax holiday” proposal from Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) actually would lose revenues (so it couldn’t pay for highway construction as they claim), we cited a 2014 Joint Committee on Taxation (JCT) analysis showing that a new holiday would expand deficits.  The Paul-Boxer holiday is designed to push more of its revenue losses outside the ten-year budget window, thereby hiding the true long-term cost.  But, like any repatriation holiday, it would bleed revenues for decades.

A new repatriation holiday (following the one that policymakers enacted in 2004) would allow U.S.-based multinational corporations to bring profits they hold overseas back to the United States at a temporary, vastly reduced tax rate.  It would boost revenues during the holiday period, as companies rushed to take advantage of the temporary low rate.  But it would lose revenues thereafter.  As JCT explained, the biggest reason is that a second holiday would encourage companies to shift more profits and investments overseas in anticipation of more tax holidays, thus avoiding taxes in the meantime.

JCT’s analysis of a two-year holiday featuring a 5.25 percent rate on overseas profits clearly shows how it would lose revenues after the holiday years (see graph).

The Paul-Boxer plan gives firms five years to take advantage of its holiday rate of 6.5 percent, so its costs likely wouldn’t begin showing up until the sixth year.  As a result, over the initial decade it could be less expensive or even appear to be revenue-neutral or raise money, but it would still cost money over the long run.  By delaying the federal costs, spreading out the holiday could function as a timing gimmick.  Policymakers who pretend to use the holiday to “pay for” highways or anything else would only add to long-term deficits.

The Paul-Boxer plan shouldn’t be confused with the President’s proposed mandatory transition tax on offshore profits to pay for infrastructure.  Unlike a repatriation holiday, a well-designed transition tax would raise real revenues and is a sound way to deal with multinationals’ vast pile of offshore profits.

Paul-Boxer Repatriation Tax Holiday Can’t Pay for Highways

January 29, 2015 at 4:48 pm

Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) just proposed a “repatriation tax holiday,” which would allow U.S.-based multinational corporations to bring profits they hold overseas back to the United States at a temporary, vastly reduced tax rate.  They claim it would not only “boost economic growth and create jobs” but also raise revenues to pay for extending the Highway Trust Fund.  In reality, it wouldn’t do either.

A repatriation holiday enacted a decade ago proved a dismal economic failure.  As our paper explains, a wide range of studies — by the National Bureau for Economic Research, Congressional Research Service, Treasury Department, and outside analysts — found no evidence that it produced any of the promised economic benefits, such as boosting jobs or domestic investment.

Moreover, a repatriation holiday would lose billions of dollars after the first two years, so it can’t “pay for” highway construction or anything else.  A new repatriation holiday would lose $96 billion over 11 years, the Joint Committee on Taxation (JCT) estimated last year (see graph).  The Paul-Boxer proposal has a somewhat higher “holiday” tax rate on those overseas profits than the one JCT analyzed (6.5 percent versus 5.25 percent) so it might lose less revenue.  But it wouldn’t raise money.  And it would make our long-term fiscal challenges harder.

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.  As JCT explained, the biggest reason is that a second holiday 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.

To be clear, a repatriation holiday is very different from a transition tax on overseas profits, such as the proposal from former House Ways and Means Chairman Dave Camp.  Any future corporate tax reform package would likely include a transition tax on existing foreign profits to clean the slate of existing tax liabilities.  But a transition tax would be mandatory:  multinationals would have to pay U.S. taxes on their foreign profits whether they repatriate them or not.  By contrast, under a repatriation tax holiday, companies choose whether to repatriate their earnings, and the tax rate would be set extremely low to incentivize them to do so.

Also, a transition tax would be coupled with reforms to reduce or eliminate companies’ incentive to stockpile profits overseas — whereas another repatriation holiday would encourage firms to stockpile profits offshore, as noted above.

For these reasons, a well-designed transition tax — unlike a repatriation holiday — would reduce deficits, not raise them.

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.