The usually pro-tax holiday Heritage Foundation changes mind, comes out against it.
Corporations and others have been lobbying for months for another round of repatriation for trapped overseas cash a la 2004. And usually the Heritage Foundation is right there behind the effort.
But not anymore. The Foundation today released a paper that doesn’t support a tax holiday. Writing on the Foundation’s Web site, authors J.D. Foster, a fellow in Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies and Curtis Dubay, a senior analyst in tax policy in the Roe Institute at The Heritage Foundation, agree with what many critics have to say about the 2004 go-round: it wasn’t effective in producing jobs and this time it won’t work either.
“The repatriation holiday would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained today. Any investment, any action that they would deem worthwhile today can be and is being financed by current and accumulated earnings. For those rare instances in which outside financing is needed, interest rates remain at historic lows and few if any of these repatriating companies are constrained. Adding to their financing abilities will not increase the opportunities for investment.”
As recently as December 2010 the Foundation supported a tax holiday. However it now supports long-term fix instead: a territorial tax system. Under a territorial tax regime, profits are only taxed by the country where the income is earned. This is the regime used by many other countries, including Canada, France, Germany and the Netherlands.
“So, rather than a temporary tax holiday, a better approach would be to consider a step toward permanent, forward-looking territoriality,” the authors write. “In practice, territoriality may be achieved simply by allowing companies an explicit exemption for some or all of their repatriated earnings.”
Many companies, particularly those in the tech space, support a temporary low-tax repatriation. Many are part of a lobbying effort called Win America. According to that organization, Congress doesn’t have the political will to make the critical changes needed in the tax code, so, they reason, why wait for something that might never happen? (See related story here). The White House and the US Treasury are strongly opposed to a temporary tax holiday. Assistant Treasury Secretary for Tax Policy Michael Mundaca, who wrote on a Treasury Department blog that, “Comprehensive [tax] reform can be done. We should not allow ourselves to be distracted from that goal.” The authors of the latest study actually quote Mr. Mundaca and call his opinion the appropriate way forward.