New York Times
October 23, 2011
Big business has clearly decided that the economic crisis is too important to waste. While Washington debates how to create jobs and cut the budget deficit, major corporations — read major campaign contributors — are pushing Congress for an enormous tax cut on corporate profits. Lawmakers seem all too eager to grant their wish.
Specifically, multinational corporations — including Cisco, Pfizer and Qualcomm — want a temporary “tax holiday” that would allow them to bring foreign-held earnings back to the United States at a vastly reduced tax rate.
A bill in the House would tax repatriated earnings at 5.25 percent, a fraction of the usual rate of 35 percent; a bill in the Senate would cut the rate to 8.75 percent, or 5.25 percent for companies that added jobs.
The corporations say a tax holiday would help to create jobs, mainly by giving them money to hire and expand. But the National Bureau of Economic Research, the Congressional Research Service, and private researchers concluded that the last tax holiday, enacted in 2004, largely failed to spur investment or job growth. Companies spent most of the repatriated $300 billion on dividends and stock buybacks, enriching executives and shareholders.
These days, corporations are flush with $2 trillion in cash that is not being used for hiring. As long as the economy is weak and consumers aren’t spending, tax cuts will add to the cash pile, not create jobs. A tax holiday also would add to the deficit, in part because companies rush to bring money home, rather than repatriating the earnings over time at the usual rate. According to Congress’s Joint Committee on Taxation, another tax holiday at 5.25 percent would increase the deficit by nearly $80 billion over 10 years; a rate of 10.5 percent would cost $42 billion.
A report by the Senate Permanent Subcommittee on Investigations leaves no doubt that tax holidays encourage tax avoidance — as companies use accounting maneuvers to shift profits offshore and then wait for the next tax holiday before bringing the money back.
The Senate panel said 7 of 19 companies that participated in the first tax holiday repatriated between 90 percent and 100 percent of their profits from offshore tax havens, like Bermuda, the Cayman Islands, Panama and Ireland. The subcommittee also found that corporations that repatriated large sums under the first holiday have since built up their offshore funds at a greater rate than before.
Yet, in the warped politics of Washington, a second tax holiday is a distinct possibility. Senator Charles Schumer, a Democrat of New York, and other Democratic senators have floated the idea that a tax holiday could be used to establish an infrastructure bank. They are focused on the short-run revenue gain from a tax holiday and playing down the substantial revenue loss over time. Mr. Schumer says he would not support a rate as low as 5.25 percent, but even a higher rate would be a big revenue loser.
Similarly, the bipartisan deficit reduction supercommittee, reportedly hamstrung in its quest for trillion-dollar budget cuts, might also try to use the short-run revenue gain from a tax holiday to mask the depth of spending cuts. Or Congressional Republicans may demand passage of a tax holiday in exchange for extending federal unemployment benefits, which expire at the end of the year.
The White House has rightly opposed another “one-time” tax holiday, but politics are pulling in the other direction. Unless President Obama leads the fight, this wrongheaded policy is too likely to become the law of the land. The evidence is there. A corporate tax holiday won’t create more jobs. What it will do is raise the deficit.