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Dissents: Why we should give multinationals a tax holiday

My post criticizing a "repatriation holiday" -- a limited period in which multinational corporations who bring overseas income back into the United States would get a big tax break -- channeled a lot of the economists I've talked to about this idea. But Sonecon's Rob Shapiro, whom I probably should've talked to about this idea, wrote in with a dissent:

1) It’s not at all clear from the literature that the 2004 version failed – the two critiques were based on modeling, not firm-level data, which really showed that the money was fungible (i.e., they used the funds for the permitted purposes, but shifted other funds to non-allowed purposes like stock buy-backs) . The only study that used real firm level data on how they used the funds – an academic survey of actual users of the break – did find that the funds went for the allowed purposes such as investment and payrolls (confirmed by data showing, for example, that wages went up in multinational corporations in the sectors that used the break heavily).

2) It’s also unclear, at best, that it cost revenues: Much of these overseas earnings will never come back at the full tax (especially when we have the world’s highest corporate rate, and especially those funds held in low-tax countries like Ireland). JCT’s prediction that the funds brought back under the tax break would simply be shifted from later years – so that that repatriations would fall sharply after tax break expired – didn’t turn out to be accurate. Repatriations returned to near normal levels in 2007 (IRS data for the last year we have on this).

3) This could work much better than in 2004 if we make its terms more restrictive: To spur jobs, let multinational corporations bring back $ at a reduced rate only if they first expand their total workforce and payrolls by, say 5% -10%.

By Ezra Klein  | October 25, 2010; 12:04 PM ET
Categories:  Taxes  
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Comments

I'd just like to point out that these "Dissents" sections are quickly becoming one of my favorite parts of the blog. Not only is Ezra posting expert/commentator responses, but occassionally well thought out comments from here at the blog. It's so incredibly refreshing to see a conversation develop on the site itself and to see varying viewpoints given voice. Plus, it's just incredibly classy to do a post like this rather than ignoring criticism, especially if it's from sources that you didn't think to check with before initially posting.

Posted by: MosBen | October 25, 2010 12:29 PM | Report abuse

"3) This could work much better than in 2004 if we make its terms more restrictive: To spur jobs, let multinational corporations bring back $ at a reduced rate only if they first expand their total workforce and payrolls by, say 5% -10%."

5%-10%?!

Consider yourself the CEO of a multinational with 30,000 employees. Are you really going to add 1,500 - 3,000 FTEs you otherwise wouldn't want so that you can bring some cash back to the U.S. at a reduced tax rate? Or would you just leave it parked overseas?

Would it be that awful if we let the corporations bring back 100% of the cash for their own use?

Posted by: justin84 | October 25, 2010 12:39 PM | Report abuse

It might be helpful to the multinationals if they faced something they understood.
In other countries nationalization seemed to be the way to handle multinationals. You might want to begin with the Middle East where the transfer of oil companies to national states went smoothly.
Or you might want to examine the more difficult transfers of wealth by communist regimes which simply failed to pay off bondholders.,a trick they learned from the US government which failed to cover the bonds held by Confederate investors.
Then our Congress can declare war and seize the assets of those nations who happen to be on the wrong side of the fence.This darkest prospect has largely been forgotten but has been utilized recently by our nation and EU nations.
Presently the IRS is locked onto two major sources of unreported income.Immigrants who have no assets,yet clear all credit checks. The other are the narcotics gangs who appear to be beyond any recognizable taxation policy,but as most GMen recall were brought low by the FBI and IRS back in the 1930's.
But resources can be shifted toward multinationals who have assets and bank accounts inside the US,and who also have assets in tax havens like Bermuda.
The Starr Corporation still supports Mr. Hand Greenberg and it provides him with an income.Presently it lies beyond the pesky view of shareholders and AIG creditors of AIG who stand to lose a fortune if he continually plays this perfectly legal card.
One wonders if Hank wants to become the poster boy for the folks at NSA,FBI,District Court and IRS team.
Those who doubt the power of EU or the US revenue hounds should recall the recent efforts into the terrorist sources of cash.

Posted by: TarheelChief | October 25, 2010 12:59 PM | Report abuse

Granted it will probably have some beneficial effect. However, to give one example, Google pays only 2.4% in taxes for its overseas profit and may not be eager to shift its funds (via Business Week): http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm

We could always close change some of the loopholes (Clinton's "check the box") but when that was suggested in 2009 some screamed bloody murder: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4.7CIfqd5h0 . Doesn't seem fair that multinationals get much of the benefit while competing domestic companies are left out to dry.

Also when people quote the marginal "world’s highest corporate rate" they always leave out the more complicated effective tax rate, which can be much lower because of tax breaks.

Posted by: chrisgaun | October 25, 2010 1:17 PM | Report abuse

Nationalize all overseas operations, take all the profits from them, then try the people responsible for outsourcing these jobs for treason and hang them by the neck until dead.

Posted by: par4 | October 25, 2010 1:19 PM | Report abuse

justin84, obviously the figure is debatable. But yeah, if we're going to say that our tax rate should be X, we shouldn't let companies park their money temporarily in some country where there are no taxes and then bring the money here for free. Even if you think that our tax rates should be lower, and I might even agree with you, we shouldn't encourage tax avoidance.

Posted by: MosBen | October 25, 2010 2:12 PM | Report abuse

MosBen,

The best way to encourage tax avoidance is to continue levying taxes high enough that corporations will go to great lengths to avoid them.

We're never going to be able to eliminate this kind of behavior, unless our corporate tax rate is cut to some absurdly low level. There will always be SOME incentive to engage in legal tax avoidance schemes as long as there is some money to be saved in the process. But reducing that incentive is the surest way of keeping at least a larger portion of those dollars in the United States.

That said, we can't just wave a magic wand and completely revamp the tax code. Even if the political will existed, it couldn't be achieved quickly.

That's why, to me, the choice is quite clear. Either you offer no repatriation holiday and ensure that all those dollars stay parked abroad, or you do offer a repatriation holiday and bring SOME of it here.

Posted by: MDA123 | October 25, 2010 2:42 PM | Report abuse

Well, but even on a repatriation holiday the specifics are up for debate. I mean, if we had a total holiday (all profits brought in during the timeframe would be completely untaxed), but required the firms to hire .1% more employees, surely that would be better from a company's perspective than a holiday that temporarily reduced the tax rate to 10% with no such requirement.

The question we really need answered is whether these sorts of holidays are an effective mechanism to change behavior? If we find that they are, then it's just a matter of finding the specific formulation which will achieve something positive for the country as a whole while still encouraging companies to take advantage of the holiday.

Posted by: MosBen | October 25, 2010 3:26 PM | Report abuse

This really gets to the heart of the debate of whether corporations should be treated as individuals, and I think this is a case where the resounding answer is no.

It is clear that any corporation with interests outside the country will move their money to the lowest tax shelter possible. However, what you're not going to see is individuals (i.e. CEOs and board members) leaving this country. They continue to reside here because despite bemoaning the intrusive federal government, the lifestyle and standard of living is still among the best in the world.

So, I would argue that we should drop corporate taxes all together and tax the profits when they get into the hands of the executives and shareholders as some form of income. Don't let compensation by stock and stock options be taxed as capital gains, and possibly introduce a millionaire's tax bracket where all income whether from capital gains or otherwise is taxed at a single rate.

Are these companies going to move jobs and money overseas? definitely. Are they going to move their place of residence out of this country? I don't think so.

Posted by: AnonymousInMA | October 25, 2010 4:40 PM | Report abuse

"Nationalize all overseas operations, take all the profits from them, then try the people responsible for outsourcing these jobs for treason and hang them by the neck until dead."

In other words, par4 wants to rob and murder Americans who are peacefully trading with non Americans.

Yikes.

Posted by: justin84 | October 25, 2010 5:59 PM | Report abuse

"justin84, obviously the figure is debatable. But yeah, if we're going to say that our tax rate should be X, we shouldn't let companies park their money temporarily in some country where there are no taxes and then bring the money here for free."

On the plus side, I think we'd find a lot of companies bringing their money here if it were free to do so.

Posted by: justin84 | October 25, 2010 6:02 PM | Report abuse

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