Corporations Say Special Tax Holiday Will Create Jobs. Don't Believe Them

Corporate America's new idea to get the economy going again is an old idea. Companies like Apple and IBM with tens of billions of dollars in oversees profits say they want to bring it all home. But they don't want to pay taxes on it. The formal term for bringing home oversees profits is repatriation. The formal term for a tax-free window is a repatriation holiday. And the formal term for the idea that this will create jobs is utter nonsense.

Here's how the nonsense would work, in theory. Companies doing business oversees pay foreign taxes (the same way a Mexican company working out of Kansas pays U.S. taxes). When they bring home profits, they pay the difference between the foreign and U.S. tax rates. That is a disincentive to invest domestically and create jobs. If Washington announces a brief "holiday" for repatriated income, every wins. A trillion bucks comes home, Washington gets a cut to pay off the deficit, and domestic investment comes roaring into the economy.

That's the theory. Here's the reality. In 2005, the Bush administration announced a holiday for repatriated income. Three hundred billion dollars came back to the United States, but "92 percent went straight to shareholders in the form of dividends and stock buybacks," David Kocieniewski writes in the New York Times. A study by the National Bureau of Economic Research found the program "did not increase domestic investment, employment or research and development."
 
"This is just a way to get money in the hands of your shareholders," Eric Toder of the Tax Policy Institute told me. "If you want to stimulate the economy by giving money to a group of people, this is the last group of people you want to give money to."

In fact, announcing a tax holiday for companies every give years or so actually encourages more investment overseas, he said. Imagine if I told you that every six months, your local grocery store would offer 50% off all canned soup. You'd buy a garbage can's worth of soup, wait six months, and load up on soup again. By that same logic, companies expecting a tax holiday every decade (essentially, a 90% discount on repatriated income) are encouraged to bring home a couple billion dollars, wait 10 years, and then bring home their money again -- tax free.

You can't blame corporations for trying to reward their shareholders and get coupons for their profits. You can blame politicians who fall for this trick every five years.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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