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More Corporate Welfare: Another Tax Holiday for Overseas Profits Proposed

As 2011 legislative sessions draw to a close, many states continue to wrestle with budget shortfalls. Some adopted responsible measures this session to rebuild prosperity through a balanced approach that included revenue generation, while others went down a destructive path relying exclusively on job-killing cuts. The same revenue debate that played out in the states is now coming to a boil in Washington D.C. as policymakers consider ways to raise revenue to address the federal deficit — including one misguided proposal that would result in more corporate welfare and provide little benefit for the nation’s economic security.

Some members of Congress have recently signaled their support for a proposal, strongly backed by large corporations and lobbyists, to create a temporary tax break on profits that corporations earn overseas. This so called “repatriation tax holiday” would allow corporations with overseas profits to avoid paying the normal corporate tax rate of 35% and instead pay a measly 5%. The rationale behind this plan is that billions of dollars would immediately be brought into the U.S. economy, serving as a fiscal stimulus and creating thousands of domestic jobs. However, this was not the case in 2004, when Congress enacted a similar tax holiday, and it would not be the case now. Instead, a repatriation tax holiday would provide yet another financial windfall for corporations that exploit the loopholes in our tax code and encourage even more American jobs and assets to be shipped overseas.

Corporations do not need another massive tax break to line the pockets of their executives and shareholders. While the middle class and hardworking families have had to contribute an ever growing portion of their incomes to taxes over the last 50 years, the burden on corporations has diminished precipitously. In 1955, corporate taxes provided over 27% of federal revenues; now they account for less than 9%. Over that same span, individual taxation has grown to the point where it now accounts for over 81% of federal revenue. And the available data shows that, contrary to popular misconception, corporations in the United States are not overtaxed compared to their counterparts in other industrialized countries, and in fact pay much less in taxes. Citizens for Tax Justice recently reported that, thanks to their exploitation of the loopholes in our porous tax code, many of the largest American corporations actually pay a negative effective tax rate.

Despite this, large corporations are now lobbying for another repatriation tax holiday. Experience has shown this to be a bad idea in the past and simple foresight reveals that the consequences will be even worse if this mistake is repeated now.

Proponents of the tax holiday claim that it will result in an economic stimulus and job creation. However, Professor Kristin J. Forbes from MIT’s Sloan School of Management notes that, following the 2004 tax holiday, “for every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages.” In fact, corporations that repatriated billions of dollars in overseas profits actually cut thousands of jobs in the immediate aftermath — Pfizer brought back $37 billion and eliminated 10,000 American jobs; Ford repatriated $850 million and laid off 30,000 workers; Merck brought back $15.9 billion and laid off 7,000 employees, and Honeywell International, which repatriated $2.7 billion, eliminated 2,000 jobs. Despite mandates in the legislation creating the tax holiday that required the benefits to be used to promote economic development, corporations instead used the money mostly to buy back their own stock and pay dividends to their shareholders. This amounts to yet another example of corporate welfare, and there is no reason to believe that the results would be any different this time.

In addition, the costs of the policy would likely be severe. Although a tax holiday would result in a short term boost in federal tax revenue, that boost would come at the expense of long term revenue and add to the federal deficit. Projections from the 2004 tax holiday show that it will end up costing the treasury$3.3 billion in lost revenueover ten years.

The costs of a new tax holiday would likely be even greater. The 2004 holiday was implemented under the condition that it would be a one-time discount, never to be repeated. However, corporations clearly expected that it would be repeated, as they immediately began to shift jobs and resources overseas. Following the tax holiday, U.S. corporations increased their permanent foreign investment of earnings by an average of $1.32 billion annually, compared to an average annual increase of $342 million prior to 2004. As such, projections indicate that another tax holiday could cost the treasury $79 billion in lost revenue, 24 times the cost of the 2004 holiday.

To prove these corporations right would be an enormous mistake. It would produce no tangible benefits for our sputtering economy and would reward corporations for moving assets overseas. In addition, it would contribute heavily to our federal deficit at a time when many crucial programs are already being cut. Policymakers should think twice before supporting another tax holiday and realize that the costs would far outweigh any perceived benefits.

This article is part of PSN's email newsletter, The Stateside Dispatch.
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