The Corporate Repatriation Tax Holiday Mirage

U.S.-based multinational corporations and their lobbyists are pushing hard for a so-called “tax holiday” that would repatriate the earnings from their foreign subsidiaries, arguing that it would inject up to $1 trillion into the U.S. economy, but the prospects for job growth are murky at best.

Companies like Apple, Cisco, Duke Energy, Google, Microsoft, Pfizer and Qualcomm are part of the Win America Campaign, which has been steadily building up support on Capitol Hill for a tax break on repatriated earnings. Instead of paying up to 35 percent in taxes on the earnings, the companies want the tax rate reduced to 5.25 percent for one year on the money they have been stashing abroad.  So far, the Obama administration has argued that any reduction on corporate taxes should be part of an overall tax reform effort that would also entail corporations giving up some of their cherished tax breaks.

Companies have been using a variety of tax strategies over the years to shift income to foreign subsidiaries, with exotic names like the Double Irish and the Dutch Sandwich, both of which have been employed by Google, as well as more routine strategies such as transfer pricing.

Cisco Systems managed to reduce its income taxes by roughly $7 billion since 2005 by attributing about half of its worldwide profits to a subsidiary in Switzerland, and moving some of its profits through Bermuda and the Netherlands, according to Bloomberg.com.

Companies argue, however, that the repatriated money could provide a boost to the U.S. economy at a time when it is sorely needed. Duke Energy CEO Jim Rogers estimates that every billion dollars invested in the U.S. would create between 15,000 and 20,000 jobs, according to The New York Times. The company currently has $1.3 billion in profits parked abroad.

The last time a repatriation tax holiday was tried, back in 2004, $312 billion came back to the U.S., but an estimated 92 percent went toward share repurchases and dividends, according to a 2009 study by the National Bureau of Economic Research.  About 60 percent of the tax breaks went to only 15 companies, and many of them laid off thousands of employees and moved even more of their facilities offshore, while waiting for the next tax holiday to come around.

Many of the companies that would benefit most from a tax holiday are those that already have billions of dollars sitting on their balance sheets in the U.S. and thus far haven't used much of their cash hoards to hire new employees. In any case, the fungible nature of money would allow them to claim the increased hiring came as a result of the tax break, even if it was just in response to market conditions. Lawmakers are also hesitant to attach stringent conditions for hiring new employees to any legislation after that proved ineffective in 2004.

Under proposed legislation introduced last month by Rep. Kevin Brady, R-Texas, corporations would be able to repatriate their foreign income at a 5.25 percent rate, but there would be a mild disincentive for them to lay off workers (see Congressional Bill Would Provide Tax Holiday on Corporate Proifts Repatriation). Every time a company cut their total workforce below the company average, they would have to add $25,000 to their taxable income. Still, many companies would find that a small price to pay, and it would be relatively easy to manipulate the figures.

A tax holiday on repatriated earnings would cost the Treasury an estimated $78.7 billion in foregone tax revenue over 10 years, according to Congress’s Joint Committee on Taxation. However, the tax holiday could generate $3.4 billion in revenue this year, $12.5 billion next year, and $9.6 billion in 2013, according to the JCT.

Another proposal that has been introduced lately would involve directing the extra tax money collected toward an “infrastructure bank” that would invest in construction and repair jobs. The proposal appears to be gaining some traction even with Democrats in Congress. Sen. Charles Schumer, D-N.Y., recently indicated that he might support the tax holiday after he opposed an attempt to bring it back in 2009, according to Bloomberg.com. Schumer, who is the third highest-ranking Democrat, also sits on the tax-writing Senate Finance Committee. Other Senate Democrats like John Kerry, D-Mass., may be changing their stance on the issue too.

The repatriation tax holiday could provide a quick boost to the economy at a time when the prospects for passing another stimulus bill through Congress appear to be scant. In 2009, when the Obama administration managed to convince Congress to pass the American Recovery and Reinvestment Act, the $787 billion legislation included about $135 billion that was supposed to go toward “shovel-ready” infrastructure projects. However, as it turned out, many of the projects were not quite as “shovel ready” as initially believed, with lengthy approval processes and other red tape bogging them down.

While now, it’s not hard to find signs at airports and highways saying that various projects were paid for with money from the stimulus bill, as well as track the various projects through the federal government’s Recovery.gov website, much of that work was a long time in coming. With a string of natural disasters across the country in recent years, ranging from hurricanes to tornadoes, floods and wildfires, damaging and destroying a vast array of infrastructure that now needs to be rebuilt, it shouldn’t be hard to find new “shovel-ready” projects that urgently need investment.

But if the bulk of the money from a corporate tax holiday goes toward funding companies’ share repurchases so executive stock options can be that much more lucrative, then taxpayers are going to be asking again what happened to all the jobs that were promised. Meanwhile, companies will be lobbying for the next tax holiday or a permanent tax holiday on the money they have been hiding abroad.