By Ted Howard
A group of US companies and others start campaign to push for a tax holiday for foreign profits.
That the Obama Administration has mostly said that a tax holiday for repatriated foreign profits is off the table for the foreseeable future hasn’t stopped the forces pushing for such a move from ramping up their rhetoric. In the same week that a Treasury official blogged that a tax holiday for US corporates wasn’t going to happen, a coalition of companies launched a tax holiday campaign called Working to Invest Now (WIN) in America.
The campaign, which includes companies like Apple, Cisco, Google and Pfizer, among more than dozen others, describes itself as a “broad and growing non-partisan campaign” working to bring the estimated $1.2tn held overseas back to the US “to invest in America.”
The goal is another American Jobs Creation Act, a la 2004, when US MNCs were allowed to bring back cash at a 5 percent tax rate. Proponents of another tax holiday predict that based on the $1.2tn figure, between $400bn and $700bn could be repatriated. And based on those estimates, repatriation could give the US government from $20bn-$36bn in tax revenue—if it were set at 5.25 percent.
But with the current administration continually throwing cold water on the idea, is it a lost cause? The WIN America campaigners obviously don’t think so. Citing support from the likes of Federal Reserve Chairman Ben Bernanke, economist Mark Zandi and a host of US senators, as well as from unlikely supporters such as Andy Stern, former president of the Service Employees International Union and California Democrat Barbara Boxer, WIN America feels it has a shot.
Haunted by 2004
The campaign does have more than a few hurdles, however, most particularly the accusation that the last time there was a temporary tax holiday, few jobs were created. This was highlighted in late March when CBS’s 60 Minutes did a piece on US MNCs’ trapped foreign cash.
This was also pointed out by Assistant Treasury Secretary for tax Policy Michael Mundaca, who argued in a blog posting that the previous tax holiday only benefited a few at the expense of the many. Cisco’s John Chambers, who appeared in the 60 Minutes episode, said this was “a fair criticism” but said the next tax holiday, if there is one, should be more broadly focused on the stimulative impact of all that money coming back to the US. “It’s about growing the economy, it’s about buying companies, it’s about paying dividends,” Mr. Chambers told 60 Minutes’ Leslie Stahl.
The importance of this point of view is illustrated in several supportive studies, most notably those from Alan Sinai, chief global economist at Decision Economics, which point to the 2004 tax holiday’s other benefits. According to data from the firm, 23 percent of the repatriated cash did go toward “hiring and training of US employees,” but more went to other forms of macro economy-boosting enterprises (see chart below).
Second highest and Rising
Currently the US has the second highest corporate tax rate, at 35 percent (or more for some companies), just behind Japan, which has a 39 percent rate. Some US corporations, due to various breaks, pay far less than 35 percent—like General Electric, which, according to a recent New York Times article, pays no US taxes at all.
But GE may have to start paying up. In his 2012 budget proposal, President Obama pledged to start chipping away a tax code burdened with GE-like “special interest tax breaks.” One of the areas where Mr. Obama proposes to start chipping is in the energy sector. The president plans on eliminating 12 tax breaks for oil, gas, and coal companies, in hopes of raising nearly $46bn over the next decade (see “For Corporates Obama Budget Gives a Little, Takes a Little” on iTreasurer.com).
However, oil companies are certain to fight this, as they already pay well over the 35 percent tax rate.
Further to this, according to the nonpartisan Tax Foundation, only about 20 percent of the tax benefits Mr. Obama refers to are “targeted” to specific industries or sectors while roughly half of them are, for the most part, available to all companies.
Comprehensive tax reform
Although the Obama Administration is cool to a tax holiday, it’s not completely against lowering taxes for corporations. However, it is more interested in a comprehensive corporate tax restructuring that would level the playing field and close tax loopholes.
In his blog, Secretary Mundaca echoed the president’s call, saying that the US should focus on comprehensive corporate tax reform and forget anything temporary. He said it was a “narrow group of businesses” pushing for another tax holiday basically for themselves and introducing another holiday would be “letting our eye off the ball of comprehensive tax reform in favor of a temporary measure.”
But Margo Thorning, SVP and chief economist at the American Council for Capital Formation (ACCF), said currently there are too many hurdles for comprehensive corporate tax relief, thus, “we may never get to it.” She said this was because in the current state of the US economy, with stimulus and other recovery expenditures to pay for, Congress “doesn’t have the political will to get it done. There are still lots of debates.”
For its part, WIN America is also for comprehensive reform, according to a spokesman for WIN America, but also feels it will take too long to implement. In the meantime, the US and the job market will suffer.
HIA 2.0 as cheap stimulus
For Cisco’s John Chambers, the repatriation supporters’ de facto spokesman, bringing the money home would provide a boost to the economy much like in 2004 —something even Ben Bernanke agrees would happen. “What is the downside for money that isn’t going to come back anyhow?” Mr. Chambers said on 60 Minutes. “I say the downside is zero.”
ACCF’s Margo Thorning said repatriated funds will have a “multiplier effect,” a term the Obama administration and others used in defense of stimulus spending. But the difference between repatriated funds stimulus and a federal stimulus of course is that the former is basically free, presuming most of the cash isn’t repatriated or taxed, while the latter must be paid for by deficit financing or tax increases, both of which are “a drag on the economy,” Ms. Thorning noted.
For proponents of a tax holiday, their battle sometimes seems to be one step forward and two steps back: while the tax-holiday cause did get fairly even coverage on 60 Minutes, stories like GE’s alleged non-payment of US taxes don’t help and in fact play into the president’s argument about selective and special interests. But it is now becoming part of the national conversation and with strained budgets across the country, it could prevail.