Candidates’ plans to repatriate profits only encourage corporate tax avoiders
The last time the US tried repatriation – in 2004 – companies took the tax breaks and fired American workers. Better to close loopholes and invest in infrastructure
If you had a spoiled 10-year-old at home who you found rifling through your wallet, what would you do? Would you spank him, explain why what he did was wrong, and dock his pocket money? Or would you laugh it off, pat him on the head, and tell him to keep the cash?
Currently, corporations booking their US profits in overseas tax havens is one of the biggest drains on the US economy. According to the Government Accountability Office, corporate tax avoidance costs the US Treasury $180bn per year. Between 2008 and 2012, 288 of the richest Fortune 500 corporations paid an effective tax rate of just 19.4%, far less than the statutory 35% rate.
And a 2013 report published by the non-partisan group Citizens for Tax Justice reveals that 111 of those 288 companies paid no federal income taxes for at least one of the five years studied between 2008 and 2012. Twenty-six companies in the Fortune 500 paid no federal income taxes at all during the entire five-year period. These corporations include household names like Boeing, General Electric, Priceline and Verizon.
As a response to this serious problem, presidential candidates representing both parties, from Senator Marco Rubio and Dr Ben Carson on the Republican side, to Hillary Clinton on the Democratic side, have called for repatriation of these offshored profits back to the US – with big tax breaks to encourage them to do it.
Their rationale is that bringing some of that money back to be reinvested in the economy is better than not having any of that money in the economy. In inside-the-beltway lingo, “repatriation” is just a fancy word for taking your bratty 10-year-old out for ice cream after you caught him with a fist full of your dollars. While it may be a temporary and convenient fix, it rewards destructive behavior and will only encourage those behaving badly to continue doing so. In fact, one could argue that the current destructive behavior corporations are engaging in is a direct result of the last time the US tried repatriation.
In 2004, President George W Bush signed the American Jobs Creation Act (AJCA) into law after it passed comfortably in both the House and Senate (Hillary Clinton voted for the AJCA as a senator). The bill was ostensibly designed to encourage more capital investment in the US by allowing corporations to repatriate offshore cash at just a 5.25% federal corporate rate. However, the exact opposite happened – Allan Sloan at the Washington Post reported that Ford Motor Company, which lobbied for the legislation, announced 30,000 additional job cuts after saving anywhere between $250m (Ford’s estimate) and $850m (Sloan’s estimate) in federal taxes. A 2005 New York Times editorial chided Hewlett Packard’s decision to fire 14,500 workers (a decision made by current presidential candidate Carly Fiorina) while repatriating $14.5bn in overseas profits. Clearly, corporations didn’t use the repatriated cash to hire new workers. So what did they use it for?
As the New York Times reported, companies reinvested their repatriated profits into buying up shares of company stock. This makes the price of the stock go up, which makes the options owned by corporate executives more valuable. Pfizer announced a multibillion-dollar stock buyback shortly after repatriating $36.9bn in offshored profits and would later fire 10,000 workers. PepsiCo bought up $7.5bn of its own stock after taking advantage of the AJCA. Even though the legislation technically didn’t allow repatriated cash to be used for stock buybacks, the bill was purposefully laden with loopholes that would allow the corporations who lobbied for it to skirt the rules.
Encouraging more bad behavior from multinational corporations will not bring back the good-paying jobs the American economy desperately needs. The surest way to create American jobs is to do as Senator Bernie Sanders has suggested and invest $1tn into rebuilding America’s broken infrastructure, which he estimates will create up to 13m new jobs. Where would that money come from? Closing the loopholes in the tax code that allow $1.8tn to leak out to offshore tax havens every decade would be a good start.
