Real Corporate Tax Reform Isn't About Repatriation Holidays

Posted: Nov 08, 2013 11:03 AM

The House-Senate budget conference would do a lot to address the corporate income tax - one of the ripest areas of policy for reform that would help economic growth at all ends of the income spectrum. It's messy, it's inefficient, and it's the most economically-harmful tax of all. It should be easy to get bipartisan agreement on it.

What wouldn't be productive is to resort to gimmicks that would allow the two sides to claim a political victory while doing nothing good for the economy. Republicans have in the past pushed for "repatriation holidays," under which American companies could bring profits made overseas back to the United States at a lower (or zero) tax rate on a one-time basis. Earlier this month, Lindsey Graham pushed for one.

Repatriation holidays do just about nothing for the economy. The Heritage Foundation released a report today saying that a repatriation holiday would not increase investment, would not create jobs, and would not fix the larger problem of the corporate tax's damage to the economy:

Businesses, like individuals, respond to incentives. If the U.S. offered a repatriation holiday, businesses would no doubt bring large amounts of foreign earnings back to the U.S. to reduce their deferred tax liability. Indeed, the last time the U.S. offered a repatriation holiday in 2004 businesses brought back $362 billion.

However, the holiday did not have the anticipated positive economic benefit... Another holiday today would have a similar negligible impact on business investment and job creation, because businesses are again not cash constrained. Businesses had almost $1.7 trillion of domestic after-tax net profits in the second quarter of 2013 at an annualized rate and even greater accumulations of cash. If they do not have enough cash or do not want to use it to fund investments, credit markets are functioning well and offering low interest rates. If they want to invest right now, businesses have access to the necessary capital to do so.

The Wall Street Journal reported on the last repatriation holiday in 2004 and declared it a failed policy. It wouldn't address the underlying problems with the corporate tax system.

Conservative apostate Bruce Bartlett wrote recently for the New York Times about the corporate tax's effect on ordinary Americans:

[M]ost people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices.

All economists reject that idea. They point out that prices are set by market forces and the suppliers of goods and services aren’t only C-corporations, which pay taxes on the corporate tax schedule, but also sole proprietorships, partnerships and S-corporations that are taxed under the individual income tax. Other suppliers include foreign corporations and nonprofits.

One of the ripest areas for federal policy to encourage both short- and long-term economic growth - for all Americans, not just Wall Streeters - is to reform the corporate tax code. That doesn't mean we have to have a "flat" corporate tax. It doesn't mean we have to eliminate the corporate tax. Just about any form of base-broadening and rate-lowering would help due to the incredible mess that the corporate tax code is. The best kind of reform, however, would be a net tax cut. The corporate tax is probably the most economically-harmful tax currently on the books, and cutting it would do a lot for American economic health.

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