Would another tax holiday create jobs?
President-elect Donald J. Trump has said he would like to create a “tax holiday” so that American companies can bring back profit that was generated overseas at a lower rate. In his view, this influx of cash will create jobs.
But corporate boards and executives may have different ideas.
They are likely to use much of the estimated $2 trillion held overseas to acquire businesses in the United States, to buy back their own stock or to pay down debt, say advisers of America’s top corporate executives.
In 2004, the United States Congress enacted such a tax holiday for U.S. multinational companies, allowing them to repatriate foreign profits to the United States at a 5.25% tax rate.
Under this law, corporations brought $362 billion into the American economy, primarily for the purposes of paying dividends to investors, repurchasing shares, and purchasing other corporations.
In 2011, Senate Democrats, arguing against another repatriation tax holiday, issued a report asserting that the previous effort had actually cost the United States Treasury $3.3 billion, and that companies receiving the tax breaks had thereafter cut over 20,000 jobs. A second repatriation tax holiday was defeated in the United States Senate in 2009.
Address the Real Problem
It’s highly likely corporations would act exactly the same as they did last time.
The problem is not tax repatriation. The problem is US corporate tax law is fatally flawed. Allowing foreign profits to accumulate overseas at low rates while charging 35% in the US is ludicrous.
It’s easy enough (in theory) to fix that problem. All one needs to do is lower corporate taxes in the US to zero, which is where they should be.
That may not or may not spur job creation by US corporations, but it would stop all these ridiculous tax games corporations play.
Curiously, such a move would create jobs, not from US corporations, but by foreign companies moving offices to the US to escape their higher tax rates.
Mike “Mish” Shedlock