The voices of Tax Policy Center's researchers and staff
U.S. multinational corporations want another tax holiday. (Who doesn’t?). Under current law, U.S. multinational corporations can defer U.S. income tax on profits earned abroad in their foreign-owned subsidiaries until they bring them home as dividends from the foreign corporation to the U.S. parent. The American Jobs Creation Act of 2004 provided them with a “one-time” chance to bring home these profits at a greatly reduced tax rate. Instead of paying the normal rate of 35 percent (with a credit to offset taxes paid abroad), Congress allowed firms that filed a “domestic reinvestment plan” to bring back funds at an effective rate of just 5.25 percent. To get the benefit of the lower rate, U.S. companies could not use repatriated profits from their foreign subsidiaries to distribute cash to their shareholders either as stock redemptions or dividends, so that the money would be available for domestic investment. The argument back then was that the holiday would stimulate jobs and investment in the United States by allowing firms to access profits trapped abroad by the U.S. tax on repatriations. However, this ignored the well-known adage that “money is fungible”—i.e., that if we require companies to reinvest repatriated profits, it will free up other cash that they can redirect as they wish.
The funds came back in a flood. U.S. multinationals repatriated $312 billion in qualifying dividends. Manufacturing firms accounted for over 80 percent of total dividends qualifying for the lower rate. Pharmaceutical and medicine manufacturers accounted for 32 percent of total qualifying dividends and computer and electronic equipment manufacturers another 18 percent.
Predictably, pressure is mounting to grant another repatriation tax holiday under the rubric of economic stimulus. What did we learn from the one-time experiment? Careful work by Dhammika Dharmapala, C. Fritz Foley and Kristin Forbes finds that “Repatriations did not lead to an increase in investment, employment or R&D – even for the firms that lobbied for the tax holiday stating these intentions. Instead, a $1 increase in repatriations was associated with an increase of approximately $1 in payouts to shareholders.”
Money is fungible after all.
Is it time for another holiday? We have no good evidence that renewing it would spur investment or job creation. Worse, a policy of renewing this “one-time” tax holiday encourages U.S. multinationals to delay bringing back profits while they wait for the next tax vacation.
Should we permanently exempt foreign profits of U.S. multinationals from U.S. taxation? Maybe. But this debate should wait until the economy is on the road to recovery and we can focus on corporate tax reform. Renewing tax holidays every few years is bad policy, especially in this case when experience shows that the last time around the holiday did not accomplish its stated goals. As one of my tax friends put it “fool me once, shame on you, fool me twice….”
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