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Repatriation Tax Holiday Rewards Bad Behavior

David Callahan

It's no secret that the technology industry is gung-ho about a corporate tax repatriation holiday. After all, many big tech firms do a huge amount of business abroad and have piled up a mountain of foreign profits that they are now itching to bring home during a one-time holiday where they would pay a fraction of the usual tax rate. In fact, no other industry now holds more cash overseas.

An analysis by Moody's in June found that Microsoft held $42 billion overseas, or 84 percent of its cash -- more than any other company analyzed. Apple was not far behind, with $40.2 billion overseas, or 61 percent of its cash. Oracle had about $22 billion, overseas -- or 90 percent of its money

No wonder these companies want a repatriation holiday. And one strategy for achieving this goal is to promote the benefits of such a holiday to a country desperate for economic hope.

Last week, the economist Laura Tyson, and the Berkeley Study Group, a major consulting firm, released a study touting a repatriation holiday that was funded by TechNet, which is Silicon Valley's leading political action committee. TechNet is also a member of Win America, a corporate lobbying effort to win a repatriation holiday.

Before saying more, let's just pause to consider the optics of this situation: an eminent academic economist -- and former top Clinton advisor -- allying herself with interested industry money and advocating the biggest one-time corporate tax break in U.S. history. The study is also being promoted on the home page of the New America Foundation, on whose board Tyson sits -- a board chaired by Google's Eric Schmidt, who could personally reap huge financial gains from a repatriation holiday as a leading shareholder of that company. (Google had $16.9 billion overseas, as of this spring.)

Tyson's study on the repatriation issue comes right on the heels of another recent study, by a Senate committee, which undertook an exhaustive review of the 2004 holiday and concluded that it failed abysmally at creating jobs or having much positive economic effect at all. The Senate study predicts that a holiday now would also fail.

Tyson's study is more useful in many ways in that it looks forward, not backward, and uses modeling to predict the effects of a holiday -- offering a far more optimistic view about the possible economic impact. Indeed, the study offers the strongest case yet for a repatriation tax holiday.

The gist of the study is that letting corporations bring home around $1 trillion in overseas cash at a tax rate of just 5.25 -- the rate in the 2004 holiday -- would provide some real stimulus:

In total, we estimate that a temporary reduction in the tax rate on repatriated foreign subsidiary earnings to a level similar to the 2004 HIA rate will generate between $178 and $336 billion in additional GDP and between 1.31 and 2.47 million new jobs.

That's not nothing in today's economy, and the logic behind these numbers seems sound: While, yes, many companies are sitting on big piles of cash and don't need more cash to invest -- they need customers -- other companies are "capital-constrained" and would use the new cash to make capital investments that would have a stimulative effect. As well, some of the foreign profits that go to shareholders would end up being spent, which would also create jobs.

But wait, there's more: The holiday would also bring in some revenue to the federal government and thus is one of the few stimulus options that doesn't cost any money, but rather makes money.

Assuming all the modeling is right, what's not to like?

A lot, actually. There is something desperate and unsavory about this proposal. Because the economy is so bad and Republicans in Congress won't fork over another dime in stimulus, we have to give the richest companies and individuals in America a gigantic handout so that a few crumbs trickle down to the legions of unemployed. Good luck selling that idea in Youngstown, Ohio. In fact, even your typical business owner should also dislike this idea, since it's a tax break that only benefits multinational corporations and exacerbates a main inequity around business taxes -- namely, the bigger you are the more easily you can engage in tax avoidance.

Worse, there is also evidence that the holiday would incentivize corporations to try to shift even more profits overseas -- hoping for future holidays. Indeed, that seems to have been one effect of the 2004 holiday. As the Senate report found:

Since the 2004 AJCA repatriation, the corporations that repatriated substantial sums have built up their offshore funds at a greater rate than before the AJCA, evidence that repatriation has encouraged the shifting of more corporate dollars and investments offshore.

The Moody's study noted that Apple's foreign cash reserves have grown sixfold since 2006. It easy to imagine that corporations like Apple have deliberately piled up money abroad -- typically in tax havens with few if any taxes -- with the expectation of another holiday.

And, as I have written here before, these companies have been using some questionable accounting tricks to disguise homegrown profits as foreign profits by shifting income overseas.

So now we should reward this bad behavior -- and encourage more of the same -- with a historic windfall?

Next stimulus idea, please.