An unpatriotic idea

By: - July 6, 2011 10:24 am

Senator Hagan’s misguided support of a tax “holiday” for giant multinational corporations

Most Americans, quite understandably, find tax law confusing as heck. It’s hard enough to know what to do with one’s own taxes, much less develop an informed opinion on the taxes paid (or, frequently, not paid) by Exxon or Microsoft. Still, when you cut through the mumbo jumbo, most debates over tax policy – even at the level of multi-national corporations – boil down to a few of pretty simple questions:

a) Should the profits a corporation makes be counted as “income”?

b) If so, should the company have to pay taxes on them?

c) If so, when are the taxes due and what is the appropriate rate?

One matter that has long been settled in this area concerns the profits big companies make in foreign countries. U.S. law makes clear that: a)  such profits are indeed income on which corporations must pay taxes, b) they must be paid at the normal corporate tax rate and c) they are due when the money is “repatriated” – that is, when it is sent back to the parent corporation from abroad. There are deductions, of course, for taxes paid to other countries.

This is actually already a very generous policy toward multi-national corporations because it allows them to defer paying taxes on overseas profits indefinitely, even though they can deduct expenses that went into earning those profits right away. It also encourages corporations to shift activity and reported profits abroad. (A better and fairer policy would simply tax corporations for all profits they make – wherever and whenever they make them.)

Nonetheless, for all of its imperfections, right now, the U.S. uses the “due on repatriation” system.

Grabbing for even more

Unfortunately, this is not generous enough for an insatiable cadre of giant multi-nationals. These companies have ginned up a well-financed campaign and hired a slew of lobbyists from both parties to get themselves a “tax holiday” under which they could “repatriate” income (i.e. pay themselves a lot of cash) and avoid paying taxes.

“Let us have our money now,” goes the argument, “and we’ll stimulate all sorts of new economic activity at home.”

In other words, it’s the same old trickledown, anti-tax message long trumpeted by corporate giants and market fundamentalists on the far right: “Cut taxes on corporations and just watch them go.” Never mind that by such “logic” the Alabamas and Mississsippis of the world would be unstoppable economic juggernauts by now.

A couple of weeks ago, even North Carolina Senator Key Hagan bought into this scheme when she spoke to the corporation-friendly think tank known as Third Way. This is an excerpt from her presentation:

“With a simple and temporary change to our tax code, also known as the repatriation holiday, we could entice many multinational companies to bring this money back to the United States for capital, for investment and, most importantly, for hiring.”

A proven failure

The main rationale advanced by Hagan and the big corporations is that there is precedent for such a “tax holiday.” President Bush and the Republican congress (Surprise!) enacted one in 2004 and Hagan claimed in the Third Way talk that it was a big success.

A more accurate examination of the 2004 holiday, however, shows just the opposite.

This is from a detailed report released late last month by the nonpartisan experts at the Center on Budget and Policy Priorities:

“In calling for the 2004 tax holiday, lobbyists for large multinational corporations framed the proposal as an economic stimulus measure, contending that the repatriated profits would be invested in corporate expansions in the United States and thereby produce a large increase in capital spending, a boost to economic growth, and a large number of new jobs. The American Job Creation Act, which authorized the tax holiday, stated that its intention was to ‘encourage the investment of foreign earnings within the United States for productive business investments and job creation.’

These promises were not borne out. As researchers at the National Bureau for Economic Research, the Congressional Research Service, the Treasury Department , and outside analysts have reported, there is no evidence the holiday had any of these positive effects. To the contrary, there is strong evidence that the repatriated earnings were used primarily to benefit corporate owners and shareholders, and that the restrictions Congress imposed on the use of the repatriated earnings to ensure they were invested in the United States were ineffective.”

In other words, despite the grandiose promises that accompanied it, the 2004 “holiday” did little more than pad the pockets of the wealthy. There is no real evidence that any kind of economic stimulus resulted and no reason to expect that things would be any different this time.

While some people – most notably former president Bill Clinton – have called for some kind of “limited” holiday that would reduce the tax rate and require “reinvestment” of the windfall, even the national Chamber of Commerce admits that such attempts are futile. According to a report from Citizens for Tax Justice, Martin Regalia, a senior vice president for the Chamber, recently told a business gathering that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

An incentive to outsource

If there’s any real proven economic result that we can count on from providing a yet another tax break to giant corporations who make a lot of money overseas it is this: more outsourcing and more tax shenanigans.

The Center on Budget and Policy Priorities report put it this way:

“Currently, firms that shift income to foreign tax havens generally understand that, while they will be able to defer tax as long as they leave their profits abroad, they will generally have to pay U.S. corporate income taxes when the profits are repatriated. This knowledge acts as a restraint (albeit a weak one) on decisions to shift investments overseas primarily for tax reasons. If Congress enacts another tax holiday, however, rational corporate executives will almost certainly conclude that more tax holidays are likely in the future and will adjust investment and tax decisions accordingly. Corporations will move more investment and jobs overseas and book more profits overseas, and then keep the profits there while they wait for another tax holiday in which the vast bulk of these profits will be exempt from tax.

In other words, the expectation of future tax holidays will make firms more inclined to shift income into tax havens and less likely to reinvest earnings in the United States — precisely the opposite of what the measure is promoted by lobbyists as accomplishing.”

Going forward

The bottom line on this matter is pretty simple:

1)      There is simply no end to the creativity of corporations and their tax lawyers when it comes to devising ways to avoid paying taxes (i.e. their fair share of the bill for our essential public services and structures);

2)      The last thing the American government or economy needs is another huge tax break for giant, profitable corporations; and

3)      Senator Hagan must know these truths and if she doesn’t, she needs to get up to speed real fast.

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Rob Schofield
Rob Schofield

Editor Rob Schofield oversees day-to-day newsroom operations, authors regular commentaries, and hosts a weekly radio show/podcast.