On Tuesday, the president outlined a plan to overhaul the corporate tax code and use short-term revenue increases to pay for investments that put the American middle class back to work. Some have characterized his plan as a “repatriation holiday”: a one-time tax break on offshored income to bring it home. But that is not in fact what his plan entails.
Under a repatriation holiday, corporations are given a big tax break on their current stockpiles of untaxed overseas income in the hope that they will then invest more money in the United States. The U.S. tried this in 2004, granting a “one-time only” tax rate of 5.25 percent as long as corporations brought their untaxed profits back to the country within the year. Corporations did take advantage of the extremely low tax rate, getting an enormous break on $300 billion in previously untaxed profits and giving the federal government a temporary revenue boost in the first year in exchange for a big revenue loss overall. Unfortunately, those corporations used 92 percent of that money to make payouts to wealthy shareholders while laying off thousands of employees over the next few years. It ended up having no appreciable effect on economic growth and costing the federal government billions in forgone taxes. Repeating such a holiday would indeed be a terrible mistake.
Yet that is not what the president has put forward. His proposal does not necessarily have anything to do with unrepatriated profits or tax breaks for bringing them back home. Many of the major reforms to the corporate tax code that are being discussed, including changes in the way that corporations pay tax on international income, tend to raise more revenue immediately after they are enacted than in later years. But they also curtail tax expenditures and raise revenue long in the future.
Gene Sperling, director of the National Economic Council, made that clear on Tuesday when he said, “This is not…a repatriation tax of any kind… In any corporate tax reform that’s been done in other countries or any proposal that you see currently, there is one-time revenue.” That extra boost is the “one-time revenue” that the president wants to spend on jobs.
So where does the one-time revenue come from? Take, for example, reforming deferral. Currently, American corporations are allowed to put off paying taxes, sometimes indefinitely, on profits that are earned abroad or controlled by foreign subsidiaries. Reforming or repealing this provision — in other words, taxing all profits immediately at either the full corporate rate or a slightly lower one — would raise substantial revenue, but a disproportionate share of the new revenue would come in the first few years. First, the reform would tax the big backlog of profits that have already been earned immediately, all in one year, creating a one-time bump in revenue. Then new profits would be taxed as soon as they are earned, creating a stream of increased revenue. Eventually the initial boost would be exhausted, leaving a steady source of revenue going forward that may be larger than under the current code but smaller than the upfront increase. Reforms to things like accelerated depreciation (which lets firms deduct the cost of equipment faster than that equipment actually wears out) or accounting techniques known as Last In First Out have similar effects.
None of these are “one-time holidays” or timing gimmicks. They raise revenue, but they do it unevenly over time. The gimmick would be treating these first few years as though they will last forever and cutting corporate rates accordingly. Reforming corporate tax breaks and spending all of the resulting revenue, including the temporary bump, on a lower tax rate that lasts forever would blow a hole in the budget after the initial revenue disappears.
This is why it is so important that the president has made clear that any “revenue-neutral” corporate tax reform must be judged on the money that will come in the second ten years after enactment, not just on initial increases.
Some commenters have added to the confusion around the president’s proposal by focusing on so-called “transition fees.” In any big change to the way offshore profits are handled by the code, there will be rules for what happens to profits earned under the current system but not yet taxed. Some of these rules can create immediate, short-lived revenue increases and losses later on, but they are not the focus of the proposal. In fact, the White House fact sheet on corporate reform does not include any specific proposal for transition fees.
The president is proposing, as he has before, that corporate tax reform should be revenue neutral in the long run. This means that there will be some temporary revenue in the first few years that can be used to pay for critical investments to get our economy back on track. But it has nothing to do with repatriation holidays or other gimmicks. It is a natural result of major changes to the corporate tax code.
Kitty Richards is the Associate Director for Tax Policy at the Center for American Progress Action Fund.