Congress is desperately trying to keep corporate profits from flowing to offshore tax havens.
It’s almost a cliché on Capitol Hill to call the current system broken. Companies—most notably Apple, based on a recent Senate report—funnel their income through foreign subsidiaries to lower their tax burden, if not eliminate much of it.
But there is an important problem with almost any fix being considered as a broader—and possibly futile—attempt at tax reform.
Getting rid of the incentives to park corporate profits abroad would help shareholders, but it might do little to help millions of jobseekers—who are supposedly the impetus for reforming the tax code.
A Thursday hearing by the House Ways and Means Committee put the dilemma into stark relief. What makes this important was experts on the panel who support reform also saying that lower tax rates would not be enough to spur hiring, unless they are accompanied by government investment in job-training programs. In other words, tax reform will help the economy, but it’s insufficient on its own for reducing the 7.6 percent unemployment rate.
Committee Chairman Dave Camp (R-MI) was looking into a solution to tax havens that his staff first floated back in a 2011 paper. Known as “Option C,” it would charge a 15 percent rate on income from “intangible assets” such as patents that U.S. companies earn overseas.
That is a stiff drop from the top marginal corporate rate of 35 percent. The lower rate would in theory remove the incentive for multi-nationals to shuffle their cash through Ireland or the Caribbean, which have lower rates.
“Companies would feel less pressure to shift income to low tax jurisdictions, because that income would be taxed at the same rate whether it’s earned in the United States or Bermuda,” Camp said Thursday. “The result of this approach is that moving intangibles to tax havens would have little or no appeal.”
The standard pitch echoed by Republicans and many economists—including the likes of ex-CBO director Douglas Holtz-Eakin and former Clinton adviser Laura D’Andrea Tyson—is that more money would flow back into the United States.
Much of the $1.7 trillion companies stockpiled abroad would be invested more efficiently and effectively, circulating back through the U.S. economy in a way that feeds growth. Companies have been pushing for a repatriation holiday for the past few years.
But Rep. Jim McDermott (D-WA) noted the trouble in this narrative, citing the previous time in 2004 when $312 billion in foreign profits were repatriated at a temporarily lowered tax rate and 600,000 workers were laid-off.
“Who is it that benefits from this un-trapping?” McDermott said, going after Camp’s Option C.
“To my mind, it’s largely their shareholders,” answered Paul Oosterhuis, a lawyer for Skadden, Arps, Slate, Meager & Flom.
“So it’s the shareholders?” McDermott said. “It’s not the workers? It’s not the economy of the country?”
“I think it largely is the shareholders, yes,” said Oosterhuis, explaining that the return of money would likely “be used to buyback stock and pay dividends” and could make it easier for companies to invest in other U.S. ventures.
The lawyer, a former congressional staffer, said that tax reform should not dictate how companies spend any money they bring back from abroad, since incentives “targeted” for job creation “tend not to work very well.”
Edward Kleinbard, a law professor at the University of Southern California, also stressed that Congress should not try to “micromanage” any profits returned from tax havens. He said the best way to improve the employment structure would be to rely on the additional tax proceeds to cover the expense of worker education.
This is a critical wrinkle in the tax reform debate, one that isn’t part of the talking points but probably should be part of the broader conversation about the budget.
“Let the money come back as part of reform,” Kleinbard said. “Use the tax revenues to fund the programs that are designed to address joblessness, that are designed to address poverty.”