August 18, 2017
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Corporate Tax Amnesty

On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.

Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common  if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.

Background of Delaney Bill

In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.

Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.

So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.

Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits

The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Not a Way to Create Infrastructure Jobs

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.

Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.