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.
Posted by: MDA123 | October 25, 2010 10:28 AM | Report abuse
Posted by: Kevin_Willis | October 25, 2010 10:38 AM | Report abuse
Posted by: rmgregory | October 25, 2010 10:41 AM | Report abuse
Posted by: illogicbuster | October 25, 2010 10:52 AM | Report abuse
Posted by: justin84 | October 25, 2010 10:59 AM | Report abuse
Posted by: ArlingtonRed | October 25, 2010 7:34 PM | Report abuse
Posted by: brickcha | October 25, 2010 10:50 PM | Report abuse
Posted by: justin84 | October 26, 2010 9:55 AM | Report abuse