A very bad tax cut — and why it might happen

at 12:44 PM ET, 03/22/2011

There are a lot of lobbyists in Washington pushing the idea that we should give multinational corporations a tax holiday if they’ll bring home income they’re currently socking away overseas. Their argument is that if we don’t offer this holiday, the corporations will never bring that money home, while if we do offer it, that money will rush home, creating jobs and investment and lots of other good stuff. To understand why this is such a bad idea, you need to understand what happened when we tried it in 2005.

The temporary holiday passed in 2004 was supposed to shrink the pile. It allowed companies to repatriate profits attributed to their foreign operations at a 5.25 percent tax rate instead of the usual 35 percent. (Companies get a credit for foreign tax already paid.) According to the IRS, $362 billion came back to the U.S., of which $312 billion was eligible for the reduced tax rate. The amount repatriated was 45 percent of the total held abroad at the end of 2004. In one of the more extreme repatriations, Hewlett-Packard (HPQ) brought back $14.5 billion—nearly all of the $15 billion that it had abroad, SEC filings show.

In the long run, though, the holiday was rife with unintended consequences. Research by Northwestern’s Brennan indicates companies rationally concluded that if they were granted one special one-time tax break, they might very well be granted another. That gave them the incentive to attribute even more of their profits to foreign operations, like a shopper waiting for an end-of-season sale. By the end of 2006 the total “permanently” reinvested abroad had exceeded the 2004 peak. It has continued to grow since.

That’s from this terrific piece by Peter Coy and Jesse Drucker. But if you read the piece, you’ll also realize that all the good arguments in the world might not be able to stop this bad idea from happening. There’s a lot of money riding on it, so there’s a lot of money behind it. “The pro-holiday coalition has quietly assembled an all-star lobbying and communications team,” report Coy and Drucker. The communications strategist is Anita Dunn, “who served as President Barack Obama’s interim communications director during his first year in office.” The lead lobbyists are “former Representative Jim McCrery of Louisiana, who was the ranking Republican on the House Ways and Means committee, and Jeffrey A. Forbes, the former chief of staff to Senate Finance Chairman Max Baucus.” That’s a lot of firepower.

 
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