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Lawmakers in Congress have been discussing a second tax holiday for U.S. corporations’ offshore tax profits, after having sworn that the first such holiday, enacted in 2004, would be a one-time event.
Typically, when multinational U.S. corporations bring overseas profits back to the United States (when they “repatriate” offshore profits) they have to pay U.S. corporate income taxes. The statutory tax rate for corporate income is 35 percent, although corporations of course use many breaks and loopholes to lower their effective rate.
The tax holiday that was enacted in 2004 allowed companies to repatriate their profits and pay taxes at a rate of just 5.25 percent (that is, almost nothing).
The biggest problem is that if Congress shows that it is willing to repeat this “one-time” tax holiday, then corporations will actually have an incentive to shift profits, and perhaps even operations and jobs, offshore. Corporations could then simply wait for the next “one-time” tax holiday to bring those profits back to the U.S.
One of the lawmakers pushing the proposal is the ostensibly progressive Senator Barbara Boxer of California.
The administration decided that the adults needed to intervene. Treasury Secretary Tim Geithner made a public statement this week that the administration does not support the idea. However, even Geithner’s statement did include an alarming caveat when he said, “We are not going to look at a [tax] holiday outside the context of comprehensive reform.” (Emphasis added.)
Proponents of a tax holiday insist that companies use the money they bring back to the U.S. to create jobs, but data from the last time Congress allowed multinationals to bring back foreign profits at a very low tax rate indicates that the cash primarily ended up in the hands of shareholders through dividends and stock redemptions.
See our earlier report explaining why the repatriation tax holiday is a terrible idea.