Sure, a "Tax Holiday" on Overseas Profits Is a Great Idea -- If You Hate America

Last Updated Mar 24, 2011 12:00 PM EDT

Why did the Obama administration this week shoot down the idea of giving big corporations a "tax holiday" on their foreign profits? It's bad for the economy, says senior U.S. Treasury official Michael Mundaca in a post on the agency's blog:
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.
Such a scheme would let corporate giants such as GE and Google (GOOG) temporarily pay tax rates of as low as 5.75 percent, rather than the standard statutory rate of 35 percent, on any profits generated abroad that they return to the U.S. Advocates of the approach say that would encourage companies to re-invest the money stateside, creating jobs and boosting government tax revenue.

The funds came in, the funds went out
Problem is, that doesn't happen, Mundaca said. The nonpartisan Congressional Research Service found that the companies that got the biggest tax breaks following the 2004 rate cut went on to eliminate jobs over the next two years. Instead of hiring, they mostly used the repatriated funds to repurchase stock or pay dividends -- and to expand outside the U.S.

Former Treasury economist Martin Sullivan has calculated that since 1999 U.S. multinationals have eliminated 1.9 million jobs while increasing overseas employment by 2.4 million. Part of that is obviously because of the lower labor costs in Asia and other places. But it's also because the dramatically lower taxes on doing business abroad discourages companies from growing in the U.S.

Them that has, gets

Repatriation holidays also favor a handful of huge corporations at the expense of other companies, especially businesses without operations around the globe. In 2004, a total of five companies reaped more than one-quarter of the benefits from the tax holiday, while 15 firms got more than 50 percent. To pay for such a cut without raising the deficit, meanwhile, the U.S. would have to increase taxes on other U.S. businesses or make even deeper cuts in already tight federal spending.

Mundaca also notes that the government just gave businesses big tax breaks. Under a deal worked out in December, companies may deduct 100 percent of their capital investments in the U.S. in 2011 and up to 50 percent next year. That could amount to upwards of $110 billion for businesses to spend here at home. Such preferences are fairer, and economically more beneficial, because they benefit large and small businesses.

He did express support for lowering corporate taxes, which the feds would partially offset by closing the many loopholes that large companies, in particular, use to dodge taxes. The White House estimates that closing overseas tax preferences could raise $190 billion in government revenue over the next decade.

As I've argued before, though, that's unlikely to happen anytime soon. With Washington already in campaign mode ahead of the 2012 election, further cutting corporate taxes while millions of Americans remain jobless and face foreclosure would be foolish. In this case, good politics also happens to be good policy.

Image from Wikimedia Commons
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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