Repatriation Provision: Bush Administration Got One Right

Aviva Aron-Dine criticizes a tax cut proposal from Senator Ensign:

When the Senate Finance Committee considers stimulus legislation today, Senator John Ensign is expected to offer an amendment dealing with repatriated foreign earnings. Modeled on a provision included in the 2004 American Jobs Creation Act, Senator Ensign’s amendment would create a tax holiday during which repatriated earnings would be taxed at a rate of just 5 percent, rather than at the normal corporate income tax rate of 35 percent. That is, for a specified period, controlled foreign corporations could pay dividends to their U.S. parent corporations, and the parent corporations would pay tax on these dividends at an extremely low rate. Senator Ensign’s proposed repatriation measure suffers from the same basic problem that plagues most other business tax breaks offered as stimulus measures: it would infuse cash into large, profitable corporations unlikely to spend it quickly, and so would have little effect in stimulating the economy in the near term. Evidence from the 2004 repatriation tax holiday confirms that such a provision is more likely to provide a windfall to shareholders than to promote substantial new U.S. investment. In addition, the Ensign Amendment would not only be ineffective as stimulus, but would also create significant new problems for the economy and the tax system. A repeat of the 2004 tax holiday will lead firms to expect more tax holidays, with the unfortunate result that they will be more inclined to invest in tax havens and less inclined to reinvest earnings in the United States.

No argument here as it is true that the law firms and accounting firms just loved this 2004 provision. They pushed all sorts of ways to exploit this provision in order to lower the tax bite for their multinational clients. What amazes me came next in her discussion:

The Bush Administration opposed the repatriation provision enacted in 2004, arguing that it was weak stimulus and bad tax policy.

This White House pushed the right arguments against this proposal back in 2004 and yet the GOP dominated Congress passed it anyway. Go figure!