Global Financial Integrity

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The Fourth of Awry


Tax repatriation holidays cheat the U.S. of billions in revenue.

Tomorrow marks the Fourth of July, the day on which we commemorate the adoption of the Declaration of Independence 238 years ago. For most Americans, the Fourth of July is a day filled with barbecues, fireworks, and, most importantly, patriotism.

Recently, some politicians and corporate leaders have begun to push for another kind of holiday—a repatriation tax holiday. This holiday would provide a tax break for American multinational corporations (MNC) to return money to the United States from abroad.

In contrast to the Fourth of July holiday, which showcases Americans’ support for and appreciation of their country, this tax holiday would result in MNCs swindling America out of legitimate tax revenue. While a new tax holiday might produce some short-term benefits, it would almost certainly end up as a net negative for the country.

In 2004, the United States enacted a similar repatriation tax holiday, temporarily lowering the tax rates on corporations returning overseas funds to the United States, from 35% to roughly 5% for the money returned. Not surprisingly, this holiday ended up costing the United States considerable money in terms of potential tax revenue—experts estimate the U.S. Treasury lost a total of $3.3 billion over the past decade as a result.

The theory behind the 2004 tax break was that these corporations would use their newly returned funds to invest in the United States. The legislation specified that returned funds should be used for hiring workers and conducting research, not for executive compensation and stock buy-backs.

Unfortunately, MNCs largely subverted these requirements by simply shifting other funds to those purposes. The 15 companies that most benefited from this holiday ended up cutting more than 20,000 U.S. jobs between 2004 and 2007 and actually decreased the pace of their research spending. In contrast, the top five executives at each of these 15 companies saw their compensation rise by 27% between the years 2004-2005 and 30% between the years 2005-2006.

Additionally, the 2004 holiday’s very steep drop in tax rates motivated the MNCs to store more of their money offshore until the next tax holiday. Nine of the top ten corporations that repatriated the most money in 2004 have increasingly stashed funds offshore every year since 2004 in anticipation of another tax holiday.

MNCs claim that their money is “trapped overseas” due to high U.S. corporate tax rates and clamor for another tax holiday to “free” their money. But this money is neither trapped nor is it overseas—they just don’t want to pay all taxes on it.

While for accounting purposes the money is kept off of these companies’ U.S. books, for all practical purposes it is already in America because it is often deposited in U.S. banks, invested in U.S. bonds or securities, and posted as collateral for MNCs to borrow against in the U.S.. These companies are also highly profitable, benefit mightily from operating in the U.S., and could certainly afford to pay normal repatriation tax rates.

Multinational corporations are pushing hard for another tax holiday because it would be directly and indisputably beneficial for them. Surprisingly, they are not the only ones pushing for this break.

Many politicians are also pressing to enact another tax holiday in the hope that the anticipated tax revenue would be used to pay for spending such as replenishing the Highway Trust Fund or to fund infrastructure projects in 2015 – a top Obama administration priority.

Experts estimate that a new tax holiday would generate $19.6 billion in revenue during its first two years. This amount would hardly make a dent in the amount of funding required for either of these plans. To put things in perspective, Obama plans to spend $302 billion on infrastructure in 2015, making the tax revenue generated less than 7% of the money needed for just that one plan.

Several politicians are also hoping that the U.S. multinational corporations will invest their repatriated money back in the United States. This seems to be a classic example of hope over experience because in 2004 these corporations did the exact opposite. Not only would this tax holiday provide little immediate benefit, it would also end up costing the United States an estimated $96 billion in tax revenue over the next decade. Enacting a second tax break would only serve to encourage multinational corporations to avoid American taxes by storing even more of their money offshore since they could reasonably anticipate additional future tax holidays.

As the Fourth of July approaches, ask yourself what our Founding Fathers would think of a bill enacted primarily for the benefit of a few wealthy corporations at the expense of the country as a whole. Surely, such a bill is not consistent with long-standing American values.

Image: Flickr / Some Rights Reserved by  David Shankbone