Some observers are now calling for a “repatriation holiday” on profits held by foreign subsidiaries as a way to get companies to bring their profits home, in turn creating jobs. Unfortunately, a tax holiday on repatriated funds is a proven failure and would be expensive in both direct and indirect ways.
A repatriation holiday would allow corporations to transfer profits from foreign subsidiaries to the U.S. parent company at a steep tax discount. Currently, corporations can defer U.S. corporate tax on overseas income until profits are transferred back to the parent company. Repatriation would allow a large proportion of foreign profits to be distributed tax free to the U.S., essentially reducing the effective tax rate from 35 percent down to just 5.25 percent. On the surface, it might sound like an effective strategy for incenting U.S. firms to invest profits held abroad in the domestic economy.
But the idea is replete with problems. In many instances, these corporations already have accrued these profits tax-free—using techniques that shift reported income to tax havens like Bermuda or the infamous “Dutch sandwich” used by Google to avoid an enormous amount of tax. Certainly, taxes ought to be paid at some point.
In addition, firms aren’t likely to invest the repatriated funds. Congress passed a repatriation tax holiday in 2004 and required firms to create domestic jobs or make new domestic investments to get the tax break. Nevertheless, the firms on average used the tax break to repurchase shares or pay dividends, not increase investment. The holiday instead turned into a massive tax break for shareholders with little or no resulting economic gain or job market expansion. Why? Corporations simply reported repatriated funds as the source of money for investments or jobs they would have created anyway, and used other funds to increase shareholder wealth.
Today, domestic firms are sitting on near-record levels of liquid assets. The reason they are not investing or creating more jobs is not a shortage of cash. Allowing them to repatriate foreign profits at low tax rates would only heap more cash onto their already huge stockpile.
There are substantial costs associated with a repatriation holiday, too. First, allowing repatriation today means less taxable corporate profits in the future, which translates into less government revenue. Second, and perhaps even more costly than the lost revenue, is the dangerous precedent that firms will increasingly expect regular repatriation holidays. This expectation will induce firms to hoard profits overseas and perhaps move production abroad, betting that Congress will eventually grant them another “one-time” tax break.
For years, companies that invest overseas have claimed that this practice bolsters U.S. jobs. Now they argue that sending the money back to the U.S. would spur economic expansion. They should make up their minds.
U.S. policymakers shouldn’t become the “Charlie Brown” of the tax world, repeatedly getting tricked into trying to kick a football that just isn’t there. We do need to stimulate a wavering economy and reform our tax system, but periodic tax holidays on repatriated funds are not the way to achieve either goal.