We're Giving a Tax Holiday to Huge Companies, and It's a Terrible Idea

In 2004, the American Jobs Creation Act gave U.S. multinational companies a time window to bring home their overseas profits without paying any taxes. The intent was to spur domestic investment and job growth. In 2011, the Assistant U.S. Treasury Secretary for Tax Policy explained how this plan actually fared. It did not work out as advertised.

The issue of repatriation of foreign profits can be briefly summed up like this: America’s largest corporations routinely park profits from subsidiaries in low-tax foreign jurisdictions in order to avoid paying U.S. taxes on those foreign-earned dollars. This strategy is designed to avoid paying taxes twice, to the local government as well as the U.S. In effect, this leaves billions upon billions of dollars earned by subsidiaries of American corporations stranded abroad, with companies hesitant to make any moves to repatriate their funds just in case the government decides once again to grant them another tax pass on paying the full tax rate. This is what many companies are holding out for.

Considering the awe-inspiring amount of money left abroad because businesses reasonably wait for certainty in their taxes, this is no surprise that the idea gains some traction every now and then. If, however, the ideas that prevailed in 2004 are allowed to predominate once again, the results will be the same. The economy will see little gain from this and few new jobs will result from it.

This year, according to NerdWallet, 88% of America’s largest companies have kept cash in foreign accounts, collectively amounting to over $743 billion.

There are, however, many who realize low-tax repatriation has a negative effect. A Senate bill currently on the floor — well, not so much since the government shut itself down — seeks to curtail any possibility of corporations repatriating their money without paying the full 35% U.S. corporate income tax. It’s called the Stop Tax Haven Abuse Act, authored by Senator Levin of Michigan and cosponsored by three other Senate Democrats. Here’s a description. It’s worth considering.      

If companies know that there’s no tax holiday forthcoming, some of the thinking goes, they might decide to just pay the proper U.S. taxes to in order repatriate their foreign profits and boost their bottom lines. It’s not as though there aren’t numerous loopholes through which they reduce their tax burdens anyway.

The wisdom of having a worldwide taxation scheme like the United States uses, versus the territorial system many industrialized countries use is worth questioning, but that is an altogether different concern than allowing for a low-tax window for massive companies to repatriate past earnings. On that note, this Heritage piece is worth reading.

This kind of limited tax break only helps the largest of America’s corporations, while doing nothing for smaller companies. It provides disincentives for them and smaller companies to regularly pay taxes on foreign profits. While their money sits overseas, it does little to enhance the American economy or create jobs. Even if that money were invested in foreign economies, it would ultimately redound to the benefit of Americans.  

What Congress should do is establish that no low-tax or tax-free window is coming, so that companies have certainty and may plan for their futures. This would mollify (somewhat) the claims of those who argue that only political contributions and lobbying get anything done in D.C. If the largest of America’s companies don’t get special deals for their overseas profits, that creates encourages growth in the U.S. economy overall and would probably soon lead to higher numbers of new jobs here at home.