Summers proposed taxing foreign profits at 15 percent, a rate well below the nominal corporate rate. Like many commentators, he bemoaned the uncertainty plaguing unrepatriated earnings, saying “a clear and unambiguous commitment that there will be no rate reduction or repatriation relief for the next decade would be an improvement over the current situation.” But unlike some left-of-center pundits, Summers doesn’t think that’s the optimal solution. In this case, both the government and companies would benefit from new rules, he wrote. By lowering the tax burden on foreign profits, the government could realize substantial revenue when that cash is brought back to the United States -- provided companies are convinced an even better rate won’t be available in the future, he argued.
Taxing foreign profits at a lower rate and encouraging U.S. companies to bring permanently reinvested earnings home sounds like a Republican pitch, but some form of repatriation holiday has broad bipartisan support. And Summers wasn’t necessarily enthusiastically supporting the 2004 holiday. In fact, implicit in his argument is the idea that the initial round of repatriation caused too much cash to be stored overseas by encouraging corporate treasurers to wait for the next relief bill from Congress. Summers’s proposal of a 15 percent rate seems more like an attempt to head off another 5.25 or even zero percent holiday. So conservative business advocates and the GOP shouldn’t quite hail the former Clinton official as a convert.
And many won’t, because they are hoping for that lower rate. Business has long complained that the current tax system discourages domestic investment. The high U.S. corporate tax rate means that multinationals are better off leaving their cash in foreign countries rather than bringing it home to create jobs and help the U.S. economy -- or so the narrative goes. The reality is that the major beneficiaries of the 2004 repatriation holiday were corporate shareholders, because companies used most repatriated earnings in share buybacks. There’s no reason to suspect that this time would be any different, particularly since any savvy business could have borrowed cash to fund profitable domestic investments. No rational company would simply wait for a holiday and leave a revenue-generating opportunity on the table with interest rates at historic lows.
Despite the last holiday’s failure to create jobs, some form of repatriation relief will be in any corporate tax bill, a reality that Summers’s proposal seems to acknowledge. House Ways and Means Chair Dave Camp, R-Mich., and Sen. Ron Wyden, D-Ore., both have transition rules that amount to one-time taxes on foreign profits in their respective tax reform plans. The idea of repatriation is again picking up steam on Capitol Hill. Whatever tax reform plan comes out of Congress will probably end up taxing foreign profits at a lower rate than domestic earnings. For the fisc’s sake, let’s hope that Congress hews closer to Summers’s rate than the rate preferred by multinationals.