The Myth Of Tax Repatriation

It is pretty clear that tax "reform", in other words huge tax cuts for the rich, will not got done this year, if at all. The admission by the Trump administration that they will not even produce their own detailed tax reform proposal pretty much guarantees as much. It also allows Trump, in his usual fashion, to blame Congress for not getting it done.

But apparently one aspect of tax reform that Trump, Congress, and business all agree must be included in any legislative package is repatriation. For years, American companies have stashed profits from overseas activity offshore in foreign subsidiaries in order to avoid paying US taxes on that money. Only when those profits are sent back, or repatriated, to the American parent company do they get taxed by the US. Of course, those profits may just sit overseas on paper but, as we all know, money is fungible and there are plenty of ways that companies can put those profits to use.

As of 2015, it was estimated that there are nearly $2.4 trillion in profits held by US companies overseas. Over three quarters of that money was held by just 50 large companies, with just four, Apple, Pfizer, Microsoft, and General Electric, accounting for one quarter of the total.

These companies have played this game before. Back in 2004, President Bush and Congress passed a kind of tax amnesty, allowing US companies to repatriate their profits at a discounted tax rate. Having done that once, these companies knew full well that keeping those profits offshore would once again prompt Congress to propose yet another tax amnesty in order to get their hands on those tax dollars. The 2004 deal actually gave these companies an incentive to keep on hoarding their profits overseas.

The fact that such a huge amount of money remains untaxed is constantly used as an example that Republicans trot out to claim that corporate taxes are too high. They propose to reduce taxes on repatriated profits in order to encourage companies to pay US taxes on those profits and then pass on that new revenue in additional tax cuts to the rich. It's a real two-for, as taxes on business and the rich are both cut. At the same time, of course, the GOP also claims that companies that repatriate these profits will invest them in new American jobs.

However, a 2009 study detailed that the 2004 repatriation deal did absolutely nothing to increase domestic investment. In fact, it showed that almost every penny of each dollar repatriated went straight to shareholders in dividend payments or stock buybacks. Virtually none of it went into domestic investment.

As the Vox article makes clear, the tax system for dealing with international profits is broken. The real solution is to force those companies to pay taxes on all profits, international or otherwise. And any profits that are held offshore for a significant period be subject to a penalty rate in order encourage compliance.

That same approach should be extended to corporate profits in general. For a variety of reasons, corporate profits as a share of GDP has been rising since the 1970s, reaching an all time high in the last few years. That certainly argues against the fact that corporate tax rates are too high. In fact, it makes the case that corporate tax rates should be raised to actually put those monies to use, rather than allowing companies to sit on all that cash or distribute it back to shareholders.

Of course, that is not going to happen anytime soon. But just like the argument for actually increasing Social Security, it won't happen until someone, especially Democrats, begin talking about it.