To hear some presidential candidates tell it, if it were suddenly easy from a tax standpoint for U.S. corporations to repatriate more than $2.1 trillion in overseas earnings, the money would be in the next wire transfer home, giving the economy a jump-start like none before.
Retired neurosurgeon and Republican White House candidate Ben Carson, for instance, calls for a six-month window in which companies could repatriate those profits tax free. "You want to talk about a stimulus, that would probably be the biggest stimulus since the New Deal and FDR, and it wouldn't cost the taxpayers a penny," Carson said in an October 7 interview on CNBC.
And billionaire real estate developer Donald Trump predicted during the November 10 debate of GOP candidates that once a more attractive repatriation policy is established, "we're going to have all of this money pour back into the United States. It's going to be used to build businesses -- for jobs and everything else."
But just how effective some form of repatriation tax "holiday" would be remains a matter of furious debate among academics and policy research organizations, not to mention members of Congress. The mere mention of the idea, in fact, opens up a hornet's nest of corporate tax reform issues, ranging from deferral, earnings stripping, and transfer pricing to the establishment of a territorial tax system.
A glimpse of what's at stake comes from a recent Citizens for Tax Justice calculation that Fortune 500 companies would owe more than $600 billion in taxes if their overseas earnings were repatriated under current law, which has a top marginal rate for corporations of 35 percent.
Also driving the debate is the belief among many business groups, conservative policy analysts, and politicians that the United States overreaches and makes American companies less competitive by attempting to tax foreign earnings. Instead of such a worldwide tax system, they want a territorial system that would only tax profits made within U.S. borders.
Besides Carson, at least eight of the other 13 GOP candidates have called for offering corporations a one-time repatriation rate of 10 percent or less, along with five to 10 years to pay the taxes. Sens. Marco Rubio of Florida and Rand Paul of Kentucky offer rates as low as 6 percent and 6.5 percent, respectively.
But the Republican candidates disagree on whether the tax should be "deemed" -- meaning corporations would have to pay it on those foreign earnings, regardless of whether they repatriate them. Those who call for a deemed rate are Trump, Rubio, former Florida Gov. Jeb Bush, and Ohio Gov. John Kasich.
Meanwhile, Paul's plan better matches the spirit of a true repatriation holiday by allowing companies to not pay a tax and keep their earnings overseas, if they choose. Louisiana Gov. Bobby Jindal had a similar proposal, but he announced November 17 that he was dropping out of the presidential race. Texas Sen. Ted Cruz would make his repatriation voluntary as well, according to the Tax Foundation. Former Virginia Gov. Jim Gilmore, like Carson, would allow repatriation tax free.
But encouraging repatriation under a lower-than-normal corporate tax rate is not just a Republican cause. President Obama and Senate Minority Leader Harry Reid, D-Nev., along with Sen. Barbara Boxer, D-Calif., Senate Finance Committee member Charles E. Schumer, D-N.Y., and Finance Committee ranking minority member Ron Wyden, D-Ore., have called for repatriation incentives as a way to raise money for highways and infrastructure repairs. The president, in his fiscal 2016 budget, proposed a 14 percent deemed repatriation rate.
Laura D'Andrea Tyson, who served as one of President Clinton's top economic advisers, has also endorsed the concept of temporary tax reduction for repatriations in a paper published jointly by the New America Foundation and the Berkeley Research Group (https://goo.gl/4cUlyx).
Billionaire investor Carl Icahn, a Trump supporter, submitted an October 20 letter to the heads of the House and Senate taxwriting committees, as well as Senate and House leaders, urging immediate, favorable terms for repatriation in order to discourage corporate inversions.
Icahn also said he was forming a super PAC, initially funded with $150 million of his own money, to lobby for such legislation. "Most of these companies would be willing to pay a 5 percent to 10 percent incremental tax on this money upon bringing it back to the United States, where much of it would be invested in new capital and used to create new jobs," he wrote.
The Mid-2000s Experience
Congress enacted a repatriation holiday in the American Jobs Creation Act of 2004, which gave U.S. companies a year to repatriate earnings at a rate of 5.25 percent. Among those voting for it was then-Sen. Hillary Clinton, now the front-runner for the 2016 Democratic presidential nomination. She told crn.com in 2014 that she wants to find some way to bring back overseas funds, especially those of technology companies. Her husband, former President Bill Clinton, has repeatedly expressed support for some kind of repatriation holiday.
In response to the 2004 bill, 843 corporations brought home $362 billion out of the $804 billion that was then available for repatriation. Of the $362 billion in repatriated earnings, $315 billion qualified for the special rate.
But analysts of all ideological stripes said the 2004 legislation failed in its main missions -- spurring job creation and increasing domestic investment. Such critiques came from the Congressional Research Service and the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, as well as the National Bureau of Economic Research, the Heritage Foundation, and the Institute for Policy Studies.
According to the Senate subcommittee, the repatriated funds were largely used for stock repurchases, dividends, and executive compensation, and the 15 companies that repatriated the most overseas profits cut nearly 21,000 domestic jobs by 2007. Overall, the holiday produced "no appreciable increase in U.S. jobs or research investments, and led to U.S. corporations directing more funds offshore," said the subcommittee, concluding that "repatriation is a failed tax policy."
The CRS said, "While empirical evidence is clear that this provision [of the 2004 legislation] resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment." The CRS also said that a permanent reduction in the tax on repatriated profits "is not likely to result in an increase in repatriations."
Liberal groups point to the 2004 law as a warning against trying such holidays again. "It was an absolute disaster," Chuck Marr of the Center on Budget and Policy Priorities told Tax Analysts.
They also point to a 2014 Joint Committee on Taxation projection that a replay of the 2004 legislation could cost the government $96 billion over a decade.
But Kenneth Kies, former chief Republican tax counsel for the House Ways and Means Committee and now director of the Federal Policy Group, contends that many analyses of the 2004 legislation mischaracterized critical facts and ignored essential data. In 2011 he wrote, "Injecting hundreds of billions of dollars currently stranded abroad into the U.S. economy certainly would have a major effect on domestic economic growth and job creation." He added, "Common sense suggests as much."
Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, said in an August 2011 report prepared for the U.S. Chamber of Commerce that a second repatriation holiday offering a 5.75 percent rate would generate close to 2.9 million new jobs. He also said that criticisms over how the 2004-2005 holiday generated funds that went to dividends, retiring debt, and stock buybacks ignores that those transactions put money in the hands of other "economic actors" who continued a chain of purchases and financial transfers across the economy.
A truer study of employment effects involves looking beyond the reports from corporations themselves, he said, adding that "repatriation can be thought of as a private-sector approach to stimulus."
Another Try at a Territorial System
Conservatives say there is a key difference between the tax holiday attempted a decade ago and what the GOP presidential candidates propose. Most of the Republican candidates want the one-time repatriation rate as a transition to a territorial tax system in which the United States would no longer attempt to tax overseas profits.
"The holiday in 2004 didn't work to help the economy because it was a short-term holiday and didn't include a permanent move to a territorial system," Curtis Dubay, a tax policy analyst at the Heritage Foundation, told Tax Analysts.
But groups like the Center on Budget and Policy Priorities, Citizens for Tax Justice, the Center for American Progress, and Americans for Tax Fairness contend a temporary, low repatriation rate will -- after it ends -- only encourage corporations to shift more profits overseas in anticipation of getting other such deals in the future. One common technique in profit shifting is earnings stripping, a practice in which companies engage in excessive borrowing from foreign affiliates, leading to debt payments that strip earnings from a U.S. entity, lower its tax liability, and become income to the affiliate overseas. Another is transfer pricing, which involves the parent company paying high prices to a foreign affiliate for the right to intellectual properties or other goods and services. The payments increase expense deductions in the U.S. while moving income to the lower-taxed affiliate.
Similarly, they say a switch to a territorial system would encourage fund shifting to foreign affiliates. In 2010 the Treasury Department estimated that a switch to a territorial system could cost $130 billion over 10 years.
"A territorial tax system is like a repatriation tax holiday on steroids," Marr said.
Even Dubay said: "There is no doubt that a territorial system would increase the incentive for businesses to shift income abroad. It would be especially acute if our rate remains so high. That is why a territorial system must be paired with robust anti-base-erosion and profit-shifting policies."
Because they pay taxes to foreign governments and don't want to also face the 35 percent U.S. corporate rate, many multinationals complain about their funds being "trapped" abroad. But liberal-leaning policy groups dismiss those complaints, saying that U.S. companies get a dollar-for-dollar reduction in their U.S. taxes for what they pay overseas. And while the U.S. corporate rate frequently ranks at or near the top among OECD nations, the effective U.S. corporate rate for the largest corporations is closer to 12 percent, not 35 percent, after factoring in various deductions and other tax breaks.
Also, corporations have the freedom to bring their profits home, deposit them in American banks, and invest them in other companies or a wide range of financial instruments, including U.S. Treasury bonds, without paying any tax. They are only considered repatriated -- tripping tax liability -- if the companies spend them on their own operations.
About 70 percent of the $2.1 trillion in unrepatriated earnings is held by just 43 corporations, a group of 24 leading economists and international tax specialists said in a September 25 letter to Congress. "It seems misguided, if not foolish, to be enacting such a sweeping tax giveaway, not to mention creation of a territorial tax system, to primarily benefit a few dozen multinationals," the letter says.
Meanwhile, the repatriation rates proposed by Republican candidates are "inappropriately low" and a "huge gift" to multinational corporations, Alexandra Thornton, senior director of tax policy at the Center for American Progress, told Tax Analysts. She said those companies already receive a significant breakthrough deferral, the right to avoid U.S. taxes on foreign profits indefinitely as long as they are not repatriated.
Deferral also happens to be a practice that Sen. Bernie Sanders, I-Vt., a Democratic presidential candidate, wants to abolish. It costs taxpayers at least $90 billion a year, according to Citizens for Tax Justice. Trump has also called for ending deferral.
Thornton said the low permanent corporate tax rates -- 16 percent or less and even abolishment of the same -- proposed by some GOP candidates are misguided. "Across-the-board corporate rate reductions that are unsupported by good math and rational economic predictions are not going to help the U.S. become more competitive," she said. "They'll simply reduce the revenue we have to provide the educated workforce, basic research, strong infrastructure, and other public goods that are essential to the success of U.S. companies."