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Right Turn
Posted at 11:00 AM ET, 03/27/2011

Big Business vs. conservatives on tax reform

Milton Friedman once said, “I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.” But there is another adage: Timing is everything in life.

Last week, well below the national media radar already jammed with coverage of Libya, Bahrain, Yemen, Egypt, and Rep. Michele Bachmann (R-Minn.) and other 2012 presidential contenders, the issue of tax repatriation popped up. Under current tax law, U.S. multinationals are not taxed on revenue earned overseas; however, if and when those monies are returned to the United States, those corporations are taxed. In 2004 Congress passed a “tax holiday” allowing multinationals to return overseas earnings at a very low tax rate of 5.25 percent. Now a group of large corporations under the banner of WinAmerica is reviving the idea.

WinAmerica, which includes a wide array of firms such as Apple, Broadcom, Cisco, Duke Energy, Google, Kodak, Microsoft, Pfizer and Qualcomm, is rolling out a campaign to win over the public and Congress. The group has been hitting the conservative press with prominent tax cutters to make the case that allowing corporations to bring that revenue home would, as economist Douglas Holtz-Eakin argued, make the United States “a better location for headquarters and benefit from the ability of companies to move trillions of dollars from offshore investments to domestic expansion. If even a single dollar of investment moves into the U.S., our economy benefits.” WinAmerica is rounding up bipartisan support, getting a favorable nod from House Majority Leader Rep. Eric Cantor (R-Va.).The National Journal reported that others may be signing on: “In addition to Cantor, supporters include Sen. Barbara Boxer, D-Calif., who championed the 2004 tax holiday; Rep. Brian Bilbray, R-Calif., who introduced a repatriation bill; and Rep. Kevin Brady, R-Texas, who is currently ‘finalizing the language’ on a bill, according to a spokesman.”

But is this a good idea? Consider the politics first. The WinAmerica corporations have correctly figured out that comprehensive tax reform is unlikely to pass before 2012, so they figure they might take a shot at this single item. However, that, I think, is horridly misguided. Michael Mundaca, assistant Treasury secretary for tax policy, already took to his blog to shoot down the idea. And the idea of giving the largest corporations a break on their overseas earnings at a time the White House is decrying companies that “export jobs” is likely a complete non-starter. In the context of overall tax reform, territoriality might be one item to obtain or trade off for other items, but on its own it sticks out like sore thumb, and a grab by Big Business.

What about the merits? Conservatives shouldn’t fall for the crass populism of the left that opposes any tax reductions for employers. (How’s this for a low-brow appeal? “Treasury Department thinks multinationals should have to pay taxes.”) Still, conservatives, as they increasingly must do, should consider whether what is good for Big Business is really good for the conservative movement and for the country.

From a conservative perspective there are good reasons to oppose the repatriation measure. For starters, it would once again put the government in the position of picking some players (Kodak, for example) over others who don’t have foreign holdings. Supporters say, sure they’d like to lower the corporate rate for all companies, but in the meantime let’s do this. Well, not so fast. Once the break is given, the bidding on the corporate tax rate begins at a higher rate. Conservatives should stick to their philosophy of tax reform: the lowest possible rate, with the broadest possible base. The National Journal piece relates this argument:

Philip Swagel, a former assistant Treasury secretary for economic policy in the George W. Bush administration, said the holiday was a gimmick rather than a policy.

“Global competitiveness [in the tax code] will boost U.S. job creation, but one-off is not the way to do tax policy,” said Swagel, now a professor at the University of Maryland. “Think about what’s good policy and do that, don’t just do this one-off.”

Moreover, the risk is that by raising the issue conservatives will only stir up a hornet’s nest. Sure enough liberals are now demanding that all worldwide earnings be taxed.. The Hill reported:

A liberal group is proposing that the United States alter its policy toward overseas profits held by corporations — but not in the way some businesses are pushing for.

In a paper released Wednesday, Citizens for Tax Justice, a group with significant union ties, said America should drop its policy of allowing corporations to defer paying taxes on offshore profits until they attempt to bring that revenue back stateside.

Given the populist furor these days, I tend to think Big Business would come out on the losing side of “tax everything overseas vs. don’t tax overseas profits brought home.”

And finally, there is a matter of incentives. Proponents of repatriation argue that multinationals are at a competitive disadvantage with regard to foreign companies that aren’t taxed on their overseas earnings. True, but the root of the problem — and especially one for mid-sized, purely domestic companies — is that the U.S. corporate tax rate is too high as compared to other countries. And let’s be honest here: The measure would, you can’t escape it, make it cheaper to generate revenue overseas than at home.

Obama accepted conservatives’ arguments on keeping the Bush tax cuts for individuals (i.e. keeping marginal tax rates low); the same argument should be made on corporate tax rates. Our economy is still in a ditch, and we should be enacting broad, fair tax relief for investors, employers and individuals. Conservatives should keep their eye on the ball: comprehensive tax reform and simplification that would lower rates for everyone.

The lesson here is one conservatives should take to heart: Large corporations are willing to settle for higher tax rates in exchange for breaks like a repatriation tax holiday. The sophisticated multinationals are happy to leave smaller competitors with a higher tax bill. When we do get around to tax reform, conservatives should keep that in mind.

By  |  11:00 AM ET, 03/27/2011

Categories:  Taxes, Right Turn

 
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