Repatriation Holidays and Corporate Tax Rates

Because the money is nominally held by the offshore companies, the tax code deems the money nontaxable, even if the funds are physically held in the United States. The savings to American companies is huge: the Congressional Joint Committee on Taxation estimated that if foreign profits of United States corporations were fully taxed it would generate an additional $42 billion this year for the government — about half the amount of the automatic spending cuts enacted as part of the so-called sequester.

The companies say that they need to shield their money overseas, however, because the official corporate rate of 35 percent is the highest in the world and puts them at a competitive disadvantage. And while the offshore money may be in American banks and controlled from home, executives say it would be irresponsible to return the money to their shareholders or invest it in the United States because of the high tax rate.

Apple CEO Tim Cook said that the American corporate tax rate is just way too high, and that Apple might consider bringing $102 billion in offshore profits home if companies received a “repatriation holiday” so that their money could be taxed at under 10 percent. But as the Times reports:

A similar policy was enacted in 2004, which prompted American companies to return more than $300 billion in foreign earnings at the reduced rate of 5.25 percent. But it led to no discernible increase in American investment or hiring. On the contrary, some of the companies that brought back the most money laid off thousands of workers, and a study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses.

The cynic in me is inclined to believe that if companies figure out legal loopholes in our tax code that will allow them to not pay taxes, they’ll continue to use them.

Photo: NASA

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