A top Treasury tax official said on Wednesday that the Obama administration would not support a temporary tax holiday to allow companies to bring overseas profits back to the U.S. at a much decreased tax rate. The move has re-energized the debate over whether the economic maneuver stimulates the economy and adds jobs at home – or costs billions in lost tax revenues.
“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,” Assistant Treasury Secretary for Tax Policy Michael Mundaca wrote in a Treasury blog post. “Unfortunately, there is no evidence that it increased U.S. investment or jobs, and it cost taxpayers billions.”
According to a Congressional Research Service study in December 2010, earnings that flowed back into the U.S. in 2004 failed to increase U.S. investment and employment, or stimulate demand. Earnings were instead routed back to company shareholders through stock repurchases and dividend payments.
The 2004 law temporarily drove down the 35 percent corporate tax rate, the highest in the world, to 5.25 percent in 2005 on overseas profits. About $362 billion, or about 45 percent of all U.S. multinational profits stored abroad at the end of 2004, were brought back to the U.S., according to the IRS. Currently, U.S. multinationals have more than $1 trillion in profits stashed in overseas accounts.
Multinational corporations such as Apple, CISCO, Duke Energy, and Pfizer last month embarked on a lobbying campaign for a 2004-style tax break holiday. The move, they say, would allow their companies to use profits to create jobs stateside, rather than flow that money into foreign economies. They also say that having the tax holiday would not drain revenue from the U.S. Treasury, since that money wouldn’t be taxed at all by the U.S. if left overseas. Siding with them, House Majority Leader Eric Cantor; the Senate Finance Committee’s ranking Republican, Orrin Hatch, R-Utah; and Rep. Brian Bilbray, R-Calif., recently unveiled a repatriation bill.
“Forging consensus on fundamental tax reform will take time, so in the meantime I propose we allow U.S. multinational companies to bring back almost $1.2 trillion in overseas profits at a lower tax so they invest in our economy here at home," said Cantor.
Additional 2010 research from Northwestern University law professor Thomas J. Brennan, however, found that the 2004 holiday caused companies to stockpile more of their profits abroad. The presumption was that another tax break holiday could hit and they could cash in on the reduced U.S. rates—which are lower than what their earnings are taxed, even in ‘low tax’ jurisdictions like Ireland, where the rate is 12.5 percent.
“By doing this, we’re essentially creating a de facto system that incentivizes companies to put all their money overseas and just wait for the next holiday,” said Michael Linden, a tax expert at the progressive Center for American Progress. “That will take much of the impetus out of corporate tax reform as a result.”