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Bill Clinton wants a tax cut for corporate America — he's wrong

Gotta get those speaking fees somewhere
Gotta get those speaking fees somewhere
John Moore/Getty Images

Back on Tuesday, Bill Clinton called for a corporate income tax repatriation holiday, a phrase that makes normal people's eyes glaze over and lobbyists jump for joy.

Ex-politicians calling for this sort of thing isn't all that noteworthy — just a kind of banal shilling — but Clinton is married to a former Secretary of State who is rumored in some quarters to be a potential presidential candidate, so it's kind of a big deal. It's an especially big deal because he also said it in Juneand in May, and even back in 2011, so it's seems to be his considered opinion.

Unfortunately, it's also a terrible idea.

What's a tax repatriation holiday and why is it bad?

When an American corporate earns profits that it attributes to one of its foreign subsidiaries, it does not pay corporate income tax on those profits as long as the funds remain in the hands of the foreign subsidiary.

That means corporations with multinational operations have a strong incentive to hold excess cash abroad rather than pay taxes. Apple, with by far the biggest cash pile of any American company is the #1 practitioner of this tactic, but lots of firms do it to some extent. In order to use that money to pay dividends or finance new spending inside the United States, the money has to first be "repatriated" and taxed.

The idea of a repatriation holiday is that you declare a time-limited span in which corporations can bring offshore cash back home at an untaxed or low-tax rate. That creates a one-time surge in revenue (if you opt for the low rate) and potentially a surge in corporate spending on investments and new hires.

Fortunately, we can examine this latter proposition empirically — since Congress declared a repatriation holiday in 2004 that came with special legal requirements that the repatriated money by used to finance domestic investment. It turns out that companies did not use the money to finance investment, because corporations do not actually find it very difficult to obtain funds to finance profitable investments. They invest all the money that they want to invest, and then their cash stockpiles represent other money — profits in excess of desired investment. What they did instead was flush cash out to shareholders via dividends and stock buybacks.

And while a special holiday could generate a short-term surge in revenue, it could also exacerbate long-term problems. After all, one main reason US firms now have over $2 trillion stashed in overseas accounts is precisely that they got a holiday in 2004 and keep waiting for a new one.

Why does the US tax foreign earnings at all?

The United States is currently very unusual among major economies in attempting to tax the earnings of the foreign subsidiaries of its companies. The main reason to do this is that if we stopped doing it the government would lose a ton of revenue. That is in part because it is relatively easy for many classes of companies to "locate" their profits abroad if they want to.

Technology firms and pharmaceutical companies — to name two major industries — use a lot of patented intellectual property. A company interested in dodging taxes can set up a subsidiary in low-tax Ireland that owns all its patents. Then its operating units outside of Ireland can be made to license those patents from the Irish subsidiary. Magically you end up with a US subsidiary that has high revenues but no profits due to all the licensing fees, and an Irish patent licensing subsidiary that has enormous profit margins and a very low tax burden.

It is easy to imagine a comprehensive tax reform package that would end the practice of taxing foreign profits, make it more difficult for companies to hide US profits in foreign countries, and make up the lost revenue by raising some other form of taxes. If such a bill passed, a repatriation amnesty of some kind would be a natural complement. But it is hard to imagine a comprehensive reform passing the current Congress, and staging a standalone repatriation holiday would create terrible incentives for future conduct.

Why all this whining about corporate income tax?

(St Louis Federal Reserve)

Ask a business lobbyist or a business-friendly politician or member of the press and he'll tell you that you hear a lot of whining about the corporate income tax because the United States has the highest statutory corporate income tax rate in the world.

Meanwhile, in the real world after-tax corporate profits as a share of overall national income are at an all-time high but median household income is lower than it was in 1999. So for the plight of the overtaxed American corporation to become a leading cause of concern for a Democratic former president and potential First Gentleman of the United States is a bit peculiar.

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