Policy Documents

Tax Holiday Proponents Say It Will Bring Capital Back to the U.S.

Matthew Glans –
July 18, 2011

In order to avoid the high corporate tax rate imposed by the United States, U.S.-based companies operating internationally have been keeping their foreign earnings in subsidiaries overseas.

The United States now has the highest corporate tax rate among the 34 nations in the Organisation for Economic Co-Operation and Development, whose other members include Belgium, Britain, Canada, France, Germany, Japan (where the corporate tax rate was cut earlier this year), Mexico, Sweden, and Switzerland. Critics of U.S. tax policy argue this nation’s high tax rate has kept billions of dollars of capital in more tax-friendly countries.

Recently, members of Congress from both major political parties have called for a “tax holiday” on repatriated earnings similar to one that took place in 2004. During the tax holiday, multinational corporations may bring profits held overseas back to the United States and pay tax at a rate that could be as low as 5.25 percent rather than the normal 35 percent assessment.

Tax holiday supporters say the lower rate would induce repatriation of earnings, boosting total tax collections during the holiday (although total tax foreign tax revenue likely would decline in future years).

Worries About Incentives
Tax holiday opponents argue the 2004 tax holiday failed to produce the promised benefits and should not be repeated. These critics, including the Center on Budget and Policy Priorities, also say companies that would stand to benefit the most would be the same ones that have aggressively shifted income overseas, which could cause the holiday to backfire.

In a June 2011 Center on Budget and Policy Priorities report, Chuck Marr and Brian Highsmith argued the tax holiday would in fact encourage corporations to stow capital overseas in anticipation of future tax holidays.

“Moreover,” wrote Marr and Highsmith, “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,” they added.

Not Tax Avoidance
Supporters of the repatriation tax holiday say it could inject up to $1 trillion into the U.S. economy at no cost to taxpayers. The Tax Foundation also calls “disingenuous” the claim that U.S. multinational companies are keeping money abroad to “avoid paying taxes”—they’re just paying those taxes to foreign governments where the rates are lower.

According to the Tax Foundation, “IRS data for 2007—the most recent available—shows that U.S. companies paid nearly $100 billion in income taxes to foreign governments on taxable income of $392 billion.”

Tax Foundation President Scott A. Hodge says he prefers wider and permanent changes in corporate income taxes instead of a temporary tax holiday. But he says a tax holiday would address serious problems with the U.S. corporate tax rate.

“The motivations of those who support the repatriation holiday are correct: The high U.S. corporate tax rate and our worldwide tax system have erected an economic Berlin Wall around the country, discouraging companies from reinvesting their foreign earnings back home. For most companies, the 35 percent toll charge for bringing that money home is too stiff,” Hodge wrote on the Foundation’s Tax Policy Blog.

“What is also very troubling about this debate is the deceptive language used by critics of deferral and the repatriation holiday (this includes President Obama) that such policies allow companies to ‘avoid paying taxes’ on that income,” wrote Hodge. “They know this is misleading and should be called out on it.”

Disappointment in 2004
The response to the repatriation tax holiday has been mixed in Washington government circles. Treasury Department officials have questioned the ability of a repatriation tax holiday to boost the economy. Emily McMahon, acting assistant secretary of tax policy, wrote in a letter to North Carolina Gov. Bev Perdue (D) that the 2004 tax holiday did not achieve its intended goal of boosting the economy. Perdue has said she supports a tax holiday.

“In 2004, when Congress enacted a repatriation tax holiday, the goal was to encourage U.S. multinationals to repatriate funds from their overseas subsidiaries and use the cash to make investments in the United States,” McMahon wrote. That tax holiday cost taxpayers billions of dollars, but unfortunately, there is no evidence that it increased U.S. investment or jobs.”

In comments made at The Wall Street Journal’s CFO Network annual meeting in Washington, D.C, House Ways and Means Committee Chairman Dave Camp (R-MI), supported repatriation but argued a temporary tax holiday may not be the best long-term solution

“I’m for repatriation,” Camp said at the meeting. “Some estimate well over a trillion dollars are stranded overseas. If it doesn’t get here it gets invested there.”

Camp concluded a temporary tax holiday would likely need to be repeated.

“We did repatriation a few years ago, and here we are with the same problem,” said Camp.

Matthew Glans (mglans@heartland.org) is a legislative specialist in financial services at The Heartland Institute.