Problem: multinational corporations are sitting on a huge lump of money from profits made outside of the US, avoiding hundreds of billions of dollars in taxes. There are four ways to solve this. Three of them create millions of American jobs and bolster American competitiveness while bringing in badly needed — and overdue — tax revenue. One of them will cost millions of future jobs and industries, while draining the treasury. See if you can guess which one the corporate lobbyists are pushing for?
Hoards Of Cash Parked Outside The Country, Taxes Not Collected
In the Washington Post today Eugene Robinson says we should consider giving a tax holiday to companies to get them to bring home profits they made outside the country, and use it to create jobs. In Our best bet is to grow the economy, not cut it, Robinson writes,
U.S. companies have parked some $1 trillion in profits overseas to avoid paying the nominal 35 percent U.S. corporate rate.
As part of a reform package, why not a conditional amnesty that lets corporations repatriate a dollar tax-free for every dollar they invest domestically in ways that create jobs?
Actually it’s more than $1 trillion. American corporations are holding somewhere between $1.5 and 2 trillion dollars (or more) out of the country and away from taxation. This amount is growing every year. These companies are doing this because our tax laws allow companies to “defer” paying taxes on these profits until the money is brought back to the US, or “repatriated.”
I fear that Mr. Robinson has not thought this through, and/or doesn’t know how we got to this point.
The 2004 Mistake
In 2004, as now, companies were holding a great deal of cash outside of the country to avoid taxes. Congress was persuaded to give companies a supposedly one-time “repatriation tax holiday” with the idea that it would “create jobs.” They let companies bring money that they were holding outside of the US to avoid taxes back at a special low rate and use it to hire people and/or invest in research, plant, equipment upgrades, etc. Meanwhile the government could get at least some of the taxes owed.
They held that “outside the country” cash and taxes due (but deferred) as a hostage, demanding a tax holiday ransom before they would return it. Congress gave in.
But wait, there’s more.
Seeing that Congress was tricked into giving these companies a “one-time” tax holiday without fixing the “deferral” rule, more and more companies decided to bet that there would be future tax holidays. They invented all kinds of new ways to make it appear that their profits come from outside of the country, or just moved profits centers and jobs out of the country. The amount held outside the country is much, much greater now than in 2004.
In other words, Congress gave in and gave companies a tax holiday, and these companies broke the promise to create jobs. On top of that they started moving even more jobs and production and profit centers out of the country.
Lesson: Giving In To Hostage-Taking Causes Escalated Hostage-Taking
Congress gave in to hostage-taking in 2004, so these companies escalated and took even bigger hostages.
Lesson: If we give companies a tax holiday now we might get a few jobs out of it, but at the cost of millions of jobs as companies move more and more production and profit centers out of the country in anticipation of the next tax holiday.
A system that rewards companies with extremely low tax rates for profits made outside of the US has two effects.
1) Companies are given a huge incentive to move jobs, factories, production and profit centers out of the US. The country loses manufacturing infrastructure and the manufacturing ecosystem degrades.
2) Companies that stay in America are at a terrible competitive disadvantage.
Solution one: (This is the corporate-lobbyist preferred option.) Pay the ransom. Just give these companies another tax holiday. We will at least get a one-time, small bit of the taxes they owe and can hopefully use it to repair a few roads thereby creating a few jobs. (If Republicans don’t obstruct this as “government spending.”) The shareholders will get a huge chunk of cash that they can stash outside the country to avoid paying their taxes. All companies will be pressured to move all the rest of the jobs out of the country, in anticipation of the next tax holiday festivities.
Solution two: End deferral. Just make them bring the money back and pay their taxes. This would remove the incentive to move jobs, production and profit centers out of the country, bringing back millions of jobs as well as helping to restore America’s manufacturing ecosystem. A problem with this brute-force solution is that there are also some good reasons for companies to keep profits outside of the country. If they invest in capacity that they really do need to increase sales overseas, this is good for these American companies and better in the long term for the country.
Solution three: Don’t eliminate the deferral, tax it. Impose a fee, or surtax on deferred profits. Suppose this surtax was 5%. If a company decides to keep $1 billion of profits outside of the country, they would pay 5% of that, $50 million, each year they do this. (No, not later deducted from taxes due.) This idea has all the advantages of solution two, ending deferral, but lets companies keep cash outside of the use at a very low tax rate if they need to.
Solution four: Bring all the money back and pay the taxes due and then switch to a “sales-based apportionment” system, requiring companies to pay taxes based on where sales are made, not where products are produced. “All companies, foreign and domestic, would determine tax liability by calculating sales and pretax profits as the U.S. percentage of their overall sales.”