by Linda Beale
CRS reports on repatriation tax holiday impact
Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c
The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.
Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.
To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.
The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.
Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.
In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.
A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.
originally published at ataxingmatter