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Tax experts say holiday on earnings is a bad idea

Feb. 8, 2015

WASHINGTON — Sen. Barbara Boxer is teaming with potential Republican presidential candidate Rand Paul to promote a plan they say will fix crumbling roads but which many experts describe as a uniquely bad idea: a tax holiday on the foreign earnings of U.S.-based multinational corporations.

The California Democrat called the idea “a win-win for our economy and our country.” Paul, of Kentucky, said, “The whole point of this is to bring money home.”

Boxer has been pushing repatriation bills since she passed a one-time tax holiday through Congress in 2004. That law allowed U.S. multinationals to bring home profits they had parked abroad at a one-time tax rate of just 5.25 percent instead of the regular 35 percent corporate tax rate.

The results were widely studied and found to be a bonanza for Silicon Valley’s technology giants, but of scant benefit to U.S. workers or the federal Treasury. The National Bureau of Economic Research, the U.S. Treasury and the Congressional Research Service were among those that found no evidence the holiday boosted the gross domestic product.

Opposite effect

In fact, the tax holiday encouraged multinationals to park even more money abroad in tax havens, in hopes that another tax holiday might be in the offing. The overseas cash stockpile now has reached roughly $2 trillion, according to the White House. California technology companies have become particularly adept at using subsidiaries in Ireland, Bermuda, the Cayman Islands and other havens to escape U.S. corporate taxes.

Sen. Barbara Boxer (D-CA) speaks during a press conference to highlight measures in the House version of a government shutdown bill that would deny women affordable contraception and other health care benefits that are provided under the Affordable Care Act. (Photo by Win McNamee/Getty Images)

For this tax holiday, Boxer wants to use a one-shot revenue boost from “repatriated foreign earnings” to fill the highway trust fund that pays for new construction and maintenance on highways, bridges and mass transit. The proposal she and Paul are pushing would impose a one-time, 6.5 percent tax on profits parked overseas.

Although Boxer projects a windfall as companies bring money home at the reduced rate, the plan could actually lose revenue. The Joint Committee on Taxation, which makes formal revenue estimates for Congress, said last year that another tax holiday would cost the Treasury $96 billion over the next decade, with revenue spiking in the first two years but then dropping sharply.

Gaining momentum

“It is a terrible idea, and I’d guess that most others in tax policy would feel the same way,” said Joseph Bankman, a tax expert at Stanford University Law School.

The tax holiday “would probably be one of the largest single tax breaks ever,” Bankman said, and would “increase the level of inequality in the nation.”

Despite such misgivings, Boxer’s plan is gaining momentum. Republicans are desperate for a way to replenish the Highway Trust Fund, set to run out of money at the end of May, without raising the gasoline tax. The gas tax is the main source of highway funds and has been parked at 18.4 cents a gallon since the Clinton administration.

In its budget last week, the White House proposed a mandatory one-time, 14 percent tax on foreign earnings held overseas and a 19 percent rate on future overseas profits. Those rates are much higher than the Boxer/Paul proposal, but still represent a big cut from the current 35 percent corporate tax rate.

President Obama would also use the revenue for infrastructure, making the idea one of the few areas of possible bipartisan agreement between him and the Republican-controlled Congress.

Boxer retains significant influence on the infrastructure debate as the ranking Democrat on the Environment and Public Works Committee, the panel she chaired until Republicans took control of the Senate. The current chairman, GOP Sen. James Inhofe of Oklahoma, works closely with Boxer on infrastructure legislation and said he would look at the corporate tax holiday because “Barbara likes it.”

Boxer framed her tax holiday as a way to jump-start negotiations over the highway trust fund. Even some conservatives are cool to the idea, however, including Taxpayers for Common Sense, a nonpartisan, rightward-leaning budget watchdog group.

The group opposes the tax holiday, said Vice President Steve Ellis, in part because of “the bad signal it sends” to companies looking to shift operations overseas.

Politics in play

One conservative enthusiastically on board is Paul, a Tea Party libertarian on the opposite end of the political spectrum from Boxer. He mounted a vigorous defense of Cupertino giant Apple Computer’s overseas tax avoidance schemes in 2013.

After Apple chief executive Tim Cook was called to testify before the Senate Permanent Subcommittee on Investigations about the company’s use of untaxed Irish subsidiaries, Paul said the panel should apologize to Apple for convening a hearing “to bully one of America’s greatest success stories.”

Donald Marron, a former economic adviser to former President George W. Bush who is now at the bipartisan Tax Policy Center, said while a tax holiday could create a short spike in revenue, “from an overall budget point of view, it’s difficult to see how we pay for new infrastructure with a provision that, at least according to (the Joint Committee on Taxation), loses revenue over time.”

Marron said it would “make sense to raise the gas tax,” but lawmakers are “in this place where the political desire not to raise the gas tax is as strong as ever, the pressure for money is high, and so they’re in the market for ways to thread the politics” of paying for highways.

Carolyn Lochhead was the Washington correspondent for the San Francisco Chronicle, where she covered national politics and policy for 27 years. She grew up in Paso Robles (San Luis Obispo County) and graduated from UC Berkeley cum laude in rhetoric and economics. She has a masters of journalism degree from Columbia University. Twitter: @carolynlochhead


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