Tax Analysts Blog

Repatriation Would Hurt, Not Help, Tax Reform

 
Posted on Nov 2, 2016

Although there isn't much of a consensus on anything in Washington, there is a lot of chatter over increasing infrastructure spending.  Hillary Clinton wants to reinvest in the nation's transportation network. Donald Trump wants to spend even more than Clinton.  And lawmakers all want to find a way to replenish the Highway Trust Fund that doesn't involve a gas tax hike.  Enter a tax on deemed repatriation earnings.  There's a growing sense that Democrats, and even some Republicans, would support using a one-time tax on unrepatriated foreign earnings to both end the lockout effect and fund new and existing infrastructure needs.

This idea isn't new.  There has been talk of creating an infrastructure bank using a repatriation tax since at least 2013.  There have been several bills in Congress to that effect.  Bill Clinton floated the idea in 2014.  And Hillary has endorsed it as well

On the surface this seems like a great idea, particularly to politicians  seeking the easy way out.  U.S. multinationals have trillions of dollars abroad that they want to bring home (if the price is right), and the United States supposedly is suffering from an infrastructure crisis (despite transportation spending being higher than at any point in history).  Why not solve two problems at once?  Allow multinationals to bring their overseas profits home and pay a tax rate of 10 percent or so (instead of 35 percent) and use the tax windfall to solve highway funding forever (or at least for a little while).

But there are lots of problems with this approach -- so many that it should be rejected out of hand by sounder thinkers in Congress and the next administration.  The first is theoretical.  Repatriation has nothing to do with infrastructure and so the two really shouldn't be linked.  Martin Sullivan made this case very eloquently a few weeks ago

The second is more practical and has been raised by Senate Finance Committee Chair Orrin Hatch, R-Utah.  If you allow multinationals to repatriate their earnings as part of an infrastructure deal, then you basically are killing all efforts at tax reform, even limited international or corporate reform, for the foreseeable future.  Without both the revenue from a deemed repatriation tax and the incentive for multinationals to support a bill, there's little chance corporate tax reform or significant changes to international tax rules would ever attract enough support from lawmakers to pass.  Solving the lockout effect is about the only carrot Congress can offer to multinationals who exploit deferral and leaky transfer pricing rules to pay very little in U.S. tax.  Those types of companies (think Google, Apple, and pharmaceutical firms) don't care about a corporate rate cut from 35 to 30, or even 25, percent.  And they certainly will be opposed to almost any of the revenue raisers likely to be in a corporate tax reform plan.

Hillary Clinton, like her husband, doesn't seem to care that much about broad tax policy. And most Democrats aren't all that interested in tax reform.  So it's only natural that they would grab for low-hanging fruit when trying to pay for their pet projects.  But Congress as a whole needs to stop these infrastructure bank and repatriation proposals in their tracks.  Those "trapped" foreign earnings should be dealt with as part of a broader corporate tax plan that includes base erosion provisions and a corporate rate cut, and not used as just a revenue raiser for unrelated federal spending.

Read Comments (1)

Mike55Nov 2, 2016

Great article, excellent points made throughout.

It's worth adding that I've read nothing over the past couple months to suggest: (1) the CBO's dreary 1.8% economic growth projection for federal infrastructure spending was somehow flawed, (2) there are enough "shovel ready" projects to support more than 1/3rd of the $200B+ being discussed, or (3) that either of the first two points are even being considered, much less addressed, by those pushing for more infrastructure spending.

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