Another repatriation holiday will decrease employment and revenue

While there are numerous job creation proposals that would meaningfully lower unemployment, some lawmakers are pushing counterproductive policies disguised as job creation packages. The proposed repeat of the corporate tax repatriation holiday is one such wolf in sheep’s clothing. The repatriation holiday would allow U.S. multinational companies to return foreign profits at a tax rate of 5.25 percent instead of the 35 percent corporate tax rate, repeating a 2004 corporate tax holiday that failed to produce its intended effects. Today, non-financial U.S. businesses are sitting on over a trillion dollars in cash but still aren’t hiring; increasing aggregate demand, not the supply of corporate cash, is the solution to jobs crisis.

A recent report by the Center on Budget and Policy Priorities details why another repatriation holiday would fail to create jobs, counter-productively push investment and jobs overseas, and add to the long-term budget deficit. Firms used the 2004 tax holiday predominantly to boost share prices, and many of the firms actually laid-off thousands of American workers shortly after repatriating billions of dollars at the lower rate.

Dharmapala, Foley, and Forbes (2009) estimate that every dollar of repatriated foreign earnings was associated with a 92 cent payout in stock repurchases and dividend payments even though these were explicitly prohibited (money is fungible). Inflating the S&P 500 amounts to corporate welfare, not a jobs program.

So why would lawmakers double-down on this failed experiment in corporate tax policy? A recent report by NDN argues that a repatriation holiday will generate $8.7 billion over the next decade. This finding (and the entirety of the report) rejects the Joint Committee on Taxation’s estimate that a second repatriation holiday would result in $78.7 billion of lost revenue over a decade. The NDN report arrives at a different conclusion by stripping out JCT’s behavioral assumptions that (1) repatriation would fall several years after the holiday, and (2) that firms would reorganize, shifting earnings to foreign markets and patiently waiting for the next repatriation holiday.

Regardless of past evidence related to the 2004 repatriation holiday, you cannot extrapolate behavior from a onetime to repeated event. The 2004 repatriation holiday was sold as a one-time-only event. If companies are now led to believe that every 5-8 years they can bring foreign earnings back at a negligibly low tax rate, they would be foolish to repatriate any income at the 35 percent statutory rate. The clear impact of another repatriation holiday would reduce the expected effective tax rate for foreign earnings, inducing companies to shift more operations overseas.

Economists care about moral hazard for a reason. The moral hazard associated with repeating the repatriation holiday—leaps and bounds beyond that of the first holiday—risks decreased investment and employment in the United States while exacerbating long-term budget deficits (the ones that matter). JCT’s behavioral concerns are well founded and cannot be ignored. Consequently, this policy would be bad for employment and bad for the federal budget.