Tax Holiday for Overseas Corporate Profits Would Increase Deficits, Fail to Boost the Economy, and Ultimately Shift More Investment and Jobs Overseas

Momentum is growing in Congress behind legislation to enact another “repatriation tax holiday” that allows multinational corporations to bring profits held overseas back to the United States and pay tax on them at a rate of only about 5 percent (rather than the normal tax rate on corporate profits).  But the economic or fiscal case for doing so remains poor.

In recent days, several congressional Democrats have expressed support for some version of the legislation. The momentum comes in the midst of a major lobbying campaign for it by a coalition of large and powerful U.S.-based multinational corporations. Proponents argue that a second temporary repatriation holiday would boost domestic investment and jobs, which is the same pitch that proponents used to sell policymakers on a similar repatriation holiday in 2004 – and one with obvious resonance as the economy struggles to recover from recession and unemployment remains very high.
  
Nevertheless, the evidence shows that the first holiday failed to produce the promised results. Its primary effect was to provide a huge windfall to the shareholders of a small number of very large corporations.

Moreover, a new tax holiday would increase budget deficits by tens of billions of dollars over the coming decade.  And unlike the 2004 repatriation holiday, which was sold as a “one-time-only” event, a second holiday would send a powerful message to corporations to shift investment and jobs overseas and hold the profits there — until yet another tax holiday is declared.  Indeed, enactment of another such tax holiday would further embed the shifting of investment, jobs, and profits overseas as a major tax avoidance strategy for many U.S. multinational corporations.

• A tax holiday enacted in 2004 failed to produce the promised economic benefits.  The evidence shows that firms mostly used the repatriated earnings not to invest in U.S. jobs or growth but for purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders.  Moreover, many firms actually laid off large numbers of U.S. workers even as they reaped multi-billion-dollar benefits from the tax holiday  and passed them on to shareholders.
• Repeating the tax holiday would increase incentives to shift income overseas.  If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future.  That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.  That’s why Congress, in enacting the 2004 tax holiday, explicitly warned that it should be a one-time-only event and should not be repeated.
• The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious.  U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959.  The ten companies lobbying hardest for a new tax holiday alone have at least $47 billion in cash and other liquid assets that could be used for domestic investments — without triggering additional tax liability.
• Some of the biggest beneficiaries of a tax holiday would be firms that have aggressively shifted income overseas.  Companies in the technology and pharmaceutical industries have been particularly aggressive in shifting income abroad because they rely on intellectual property, which is relatively easy to shift to other countries as a tax avoidance strategy.  Half of all repatriations from the 2004 tax holiday came from companies in these two sectors alone.  The same corporations and sectors would stand to benefit disproportionately — and enormously — from a second tax holiday.