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An exciting post about taxing multinational corporations!

There's a fair amount of talk right now about a "repatriation holiday," which is a term just boring enough to keep anyone from paying attention. When you hear it, the words you should be hearing are "massive corporate-tax break that will have terrible long-term consequences." Let me try and explain why.

What we're really talking about here is how best to get multinational corporations pay their taxes. The way we do it now is that when a multinational brings the money they earned overseas back home -- when they "repatriate" it, to use the more technical term -- we tax it at whatever the difference is between our corporate-tax rate and the corporate-tax rate they've already paid. So if Ireland taxed them at 12 percent, when they bring the money home, we'll tax it at 23 percent, because our total corporate rate is 35 percent. That way, we make sure corporations don't just hang out in low-tax zones. At least in theory.

In practice, there's a catch: Corporations can wait to bring their income home. So they earn money in other countries, invest it for awhile, and then bring it home much later -- or maybe never. Currently, there's about $2.3 trillion parked overseas.

Lawmakers look at this and lick their lips. If they could get even a bit of that money back, they could, well, they could do all sorts of things, pay for all sorts of programs. And maybe corporations will use that money to invest in America!

So in 2004, they offered corporations a deal: Bring the money back and we'll temporarily drop the tax rate to 5.25 percent. Hundreds of billions of dollars came home. But economists consider the idea a failure (pdf): Corporations didn't change their investment patterns, and the Treasury lost out on tons of revenue.

But the real problem, they say, will come if we offer another holiday just six years after the first. If you keep offering these repatriation holidays, what begins to happen is that they're not viewed as one-time offers but periodic sales. In that world, corporations will simply wait for a holiday before they bring income home. That means they stop bringing money home in non-holiday years, and so that money goes effectively untaxed.

As an analogy, imagine that individuals didn't have to pay taxes in any given year, but only had to pay them eventually. And now imagine that every 10 years or so, Congress passed a massive tax cut for individuals who chose to pay taxes in that particular year. Everyone would just wait to pay taxes in those years, and the real tax rate in this country would plummet, even if we never cut taxes permanently.

Some politicians like this because they don't want corporations to pay taxes and/or because they're more interested in boosting revenue now than in keeping revenues stable over time. But it's not a good way to do tax policy.

By Ezra Klein  | October 25, 2010; 10:02 AM ET
Categories:  Taxes  
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Comments

You're not necessarily wrong about creating an incentive to just wait for the next repatriation holiday, but the alternative to such a policy is that NONE of that money comes back to the U.S.

You can moan and complain about the fact that companies aggressively pursue these legal tax avoidance schemes, but they do it nonetheless. And they will continue to do it so long as our corporate tax rates remain higher than most of the industrialized world.

So basically, that leaves you with three options. First, hope and pray that they just decide to bring the money home and eat the huge tax bill (not likely). Second, offer a repatriation holiday in order to create an incentive for them to bring money home that they'd otherwise never bring back (not a perfect policy, but better than nothing). Or third, reform the corporate tax code so that they don't have such a huge incentive to park the money overseas in the first place.

You seem to favor option number one, which teaches those big meanies a lesson but also results in approximately zero dollars coming home. I favor option number three, which removes the incentive for them to take their money and run in the first place.

Posted by: MDA123 | October 25, 2010 10:28 AM | Report abuse

"Currently, there's about $2.3 trillion parked overseas."

I bet it's more than that.

Also, I understand that principle for foreign earnings, but what about domstic earnings? How is it that an Exxon/Mobil rakes in billions of revenues in the U.S. and yet doesn't pay a cent of income tax on it? Can these multinationals move money outside the U.S.. even if it's earned here?

BTW, is the problem the repatriation or the rate? I.e, is repatriation so bad if companies are given a 5% or 10% discount on what they pay, rather than a flat 5.25% rate?

Or what if multinationals were require to bring home the bacon (and pay the taxes on it) every year, but corporate tax rates were lowered to 28%?

Posted by: Kevin_Willis | October 25, 2010 10:38 AM | Report abuse

The comment above from MDA123 is worth re-reading: at present, there's a good chance that many businesses will move money out of the United States permanently. In fact, there is growing incentive for individuals to do so as well.

At some point, the federal government has to join the states (and Europe, for that matter) on the austerity bandwagon which leads to lower taxes. In my mind, I wonder only if it's already too late -- is the US beyond the point where drastic reductions in the size and cost of federal government will do any good.

Posted by: rmgregory | October 25, 2010 10:41 AM | Report abuse

"Or what if multinationals were require to bring home the bacon (and pay the taxes on it) every year, but corporate tax rates were lowered to 28%?"
-------------------------------------

Ah, to be 10 years old and naive again.

They would just move out of the U.S. to a more receptive country.

Posted by: illogicbuster | October 25, 2010 10:52 AM | Report abuse

"That way, we make sure corporations don't just hang out in low-tax zones."

If we made the U.S.A. a low-tax zone, maybe they'll hang out here.

"So in 2004, they offered corporations a deal: Bring the money back and we'll temporarily drop the tax rate to 5.25 percent. Hundreds of billions of dollars came home. But economists consider the idea a failure (pdf): Corporations didn't change their investment patterns, and the Treasury lost out on tons of revenue."

Corporations didn't change their investment patterns? Well the marginal rate here remains 35% plus whatever other levies are made at lower levels of government, and besides:

"Lawmakers look at this and lick their lips. If they could get even a bit of that money back, they could, well, they could do all sorts of things, pay for all sorts of programs."

Corporations have a fidiciary responsibility to their shareholders to keep earnings away from ravenous thieves, no matter how well intentioned.

Posted by: justin84 | October 25, 2010 10:59 AM | Report abuse

Re: MDA123's post - option three makes the most sense from a tax policy perspective but the odds of completing a major rewrite of the corporate tax code anytime soon is between slim and none. Meanwhile, overseas earnings continue to build up in other countries where companies are free to spend them without penalty despite the fact most companies would prefer to have their cash back in the US. There's a reason why many of these companies are borrowing money in the US but holding massive reserves outside.

Congress ought to shoot for option three longer term but pursue option two now. Why not figure out a way to provide companies an incentive to bring their money home but put in place some requirements that might generate job creation and economic activity?

Sure it's bad tax policy but the last time I checked we've got 10% unemployment and a $1.3T deficit that's not getting smaller. We did some really crazy things in the last two years - TARP, auto bailouts, etc - that on their face were bad policy but made sense at the time given the gravity of the situation.

The economy is sputtering and I don't see anyone suggesting another $800B stimulus - so what's the alternative? Why not this?

Posted by: ArlingtonRed | October 25, 2010 7:34 PM | Report abuse

"If we made the U.S.A. a low-tax zone, maybe they'll hang out here."

Until someone else implemented an even-lower-tax zone....

In my mind, one of the key differences between liberals and conservatives is the following:

When confronted with a race to the bottom, liberals try to eliminate the phenomenon and replace it with a win-win situation. Conservatives try to run faster.

The long term solution to this problem is globally-synchronized tax codes. It is only a question of how many decades it will take to achieve this.

Posted by: brickcha | October 25, 2010 10:50 PM | Report abuse

"Until someone else implemented an even-lower-tax zone...."

I'm willing to go to zero.

"When confronted with a race to the bottom, liberals try to eliminate the phenomenon and replace it with a win-win situation. Conservatives try to run faster"

Not everyone considers a given outcome win-win. More taxes paid and more economic activity discouraged is lose-lose in my view, even if all the cool kids are doing it.

Posted by: justin84 | October 26, 2010 9:55 AM | Report abuse

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