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Treasury Notes

 Just the Facts: The Costs of a Repatriation Tax Holiday

By: Michael Mundaca
3/23/2011

[O]ver the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries.  Those with accountants or lawyers to work the system can end up paying no taxes at all.  But all the rest are hit with one of the highest corporate tax rates in the world.  It makes no sense, and it has to change.
 
So tonight, I’m asking Democrats and Republicans to simplify the system.  Get rid of the loopholes.  Level the playing field.  And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit.  It can be done.
 
--President Barack Obama, 2011 State of the Union Address
 
 
The President has called upon us all – Republicans and Democrats, his Administration and Congress, businesses and other stakeholders to come together to enact comprehensive tax reform that lowers our high statutory corporate tax rate and improves the tax system for the U.S. corporate community as a whole. 
 
Comprehensive, long-term reform has the potential to benefit businesses across the United States, and make our economy more competitive. That is why a broad range of businesses have expressed a willingness to answer the President’s challenge and come together to make our principal focus an overhaul our corporate tax code.  A narrow group of businesses has suggested that instead, our primary focus should be a temporary repatriation tax holiday – an idea tried a few years ago that gave a select group of U.S. multinational corporations a temporary, substantial tax break on their overseas profits. However, letting our eye off the ball of comprehensive tax reform in favor of a temporary measure of this kind would be a mistake. 
 
In 2004, when the U.S. enacted a repatriation tax holiday, the goal was to encourage U.S. multinationals to pay bigger cash dividends from their overseas subsidiaries and use the cash to make investments in the United States.  Unfortunately, there is no evidence that it increased U.S. investment or jobs, and it cost taxpayers billions. 
 
Although advocates argue that a repatriation holiday could be costless or even raise tax revenue, the official Congressional scorekeeper, the Joint Committee on Taxation, estimated before enactment that the 2004 repatriation holiday would actually cost billions of dollars.  In 2009, when this idea was being pushed once again, Senator Baucus indicated during Floor debates that the cost of a new holiday had increased to $30 billion, presumably because a second holiday would encourage further erosion of the U.S. tax base through shifting of profits overseas.  Moreover, according to outside estimates, just five firms got over one-quarter of the tax benefits of the repatriation holiday, and just 15 firms got more than 50 percent of the benefits.  To pay for giving this large tax cut once again to a small group of U.S. companies without increasing the deficit, we would have to raise taxes on other U.S. businesses. 
 
In assessing the 2004 tax holiday, the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.  Today, when U.S. corporations have ready access to cash they have accumulated and are holding here in the United States, it is even harder to make the case that a repatriation holiday will unlock new investment and job creation.
 
As part of the tax package agreed to last December, we are already allowing companies to deduct the full amount of eligible capital investments made here in the United States in 2011 and 50 percent of such investments made in 2012.  These expensing provisions benefit both large and small businesses, not just those with operations overseas. They could put more than $110 billion dollars in the hands of business over the next two years for investments guaranteed to be made here in the United States, at an overall cost over time of about $20 billion.   
 
In addition, the December tax cut compromise included a 2 percentage point employee-side payroll tax cut as well as a 2 percentage point reduction in the self-employment tax rate, providing more than $110 billion of tax relief to more than 150 million workers and further spurring jobs and investment.  And the December compromise came on top of the significant package of business tax incentives the President signed into law in September as part of the Small Business Jobs Act. 
 
Building on these broad tax breaks that are helping American businesses prosper, we have an opportunity now to come together around a comprehensive effort to simplify the corporate tax system, get rid of loopholes, level the playing field, and use the savings to lower the corporate tax rate without adding to the deficit. 
 
We are in the process of trying to build consensus among lawmakers, the public, and the private sector, including a broad section of the business community to do just that. The tax treatment of overseas earnings could be considered as a part of broader corporate tax reform, but as Secretary Geithner has said, it would not be sensible to consider a repatriation holiday outside of that context. 
 
Comprehensive reform can be done.  We should not allow ourselves to be distracted from that goal.
 
Michael Mundaca is the Assistant Treasury Secretary for Tax Policy.
Posted in:  Tax Policy
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