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Why a corporate tax holiday is still a bad idea

Congress may be about to grant a huge tax break to multinational companies that have stashed earnings in their foreign subsidiaries.Here's why that's a bad idea.

By Guest blogger / October 14, 2011

This photo shows Sen. John McCain on Capitol Hill in Washington discussing the introduction of a Republican alternative jobs bill. Along with Democratic senator Kay Hagan, McCain has proposed a tax holiday for multinational corporations that bring their earnings to the United States.

Manuel Balce Ceneta/AP

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In another one of those bad ideas that never seem to go away, Congress may be about to grant a huge tax break to multinational companies that have stashed earnings in their foreign subsidiaries.

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A temporary tax holiday for firms that return those profits to the United States is the latest evidence that bipartisanship is rarely what it’s cracked up to be. The latest version was proposed by senators Kay Hagan (D-N.C.) and John McCain (R-AZ).

And in one of those only-in-Washington moments, Senator Chuck Schumer (D-NY) and others want to use this massive tax cut to pay for a new infrastructure bank aimed at boosting domestic investment. How does a huge corporate tax cut (an earlier version would give away $79 billion over ten years) generate revenue? Easy. Firms would pay about $25 billion in new taxes during the temporary holiday, but save more than $100 billion down the road as they return fewer dollars to the U.S.

Hagan and McCain claim such a tax holiday would encourage multinationals to bring an estimated $1 trillion in overseas earnings back to the U.S., where they’d use the cash to create jobs and buy American-made equipment.

The reality, sadly, is quite different. There is no evidence that a similar break created any new jobs when Congress tried it in 2004. Instead, most of the repatriated dollars went to shareholders in the form of dividends or stock buybacks (which raise equity prices).

Yet, multinationals are salivating over the prospect of a holiday. Jesse Drucker over at Bloomberg reports that 160 lobbyists are working the issue. Even Apple and Google—normally bitter corporate rivals—are singing from the same hymnal.

No wonder. The Hagan-McCain bill would allow firms to pay just an 8.75 percent tax to bring home overseas earnings—far lower than the top corporate rate of 35 percent. They can get the rate down to 5.5 percent if they increase payroll in 2012 (not hard if the economy improves as many expect).

But with corporate tax reform in the wind, a holiday today could provide an extra windfall. Here’s why:

Corporate tax reform could include both a lower rate and a shift to a territorial system, which would exempt foreign earnings from any U.S. tax (and require overseas firms to pay U.S. tax on what they earn here). But the real key will be the transition from today’s rules to the new system. It is likely, given big budget deficits, that earnings already sitting overseas would be taxed at a rate higher than 5.5 percent or even 8.75 percent. So, savvy multinationals would much rather bring the dough back now at an extremely low rate and avoid paying a bigger transition tax in a couple of years.

It’s a win-win. Maybe they get lower rates and reform. If not, they’ll get a big break today and perhaps another holiday down the road. Sweet.

Will the holiday create jobs, as advertised? It didn’t work in 2004 and may be even less successful today. Firms are already sitting on more than $2 trillion in cash, more than enough to hire or invest. In the absence of growing demand for their goods and services, it is hard to see letting them move around another $1 trillion is going to boost jobs. Worse, if firms come to expect a regular holiday, they’ll stash even more profits overseas while they await the next windfall. That will make less money available for domestic hiring and investment.

At the same time, some successful firms that would have hired anyway will just enjoy the windfall.

In recent weeks, Republicans have made a passionate argument against temporary tax cuts when it came to President Obama’s plan for a short-term payroll tax holiday. An even stronger case can be made against a temporary corporate tax holiday. Yet, here we are.

Finally, something Congress may be able to agree on. Too bad.

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