The Fallacy of the Corporate Tax Holiday Idea
American Corporations hold an estimated $1.5 Trillion in profits overseas that goes untaxed. This hefty sum of money was accumulated in subsidiaries and off-shore accounts over the course of many years, not just the last one or two.
An idea that has bounced around for a long time has been to have a "tax-holiday". For those unfamiliar with the idea, it's rather basic and simple - for a designated period of time, certain activities are not taxed. In this instance, it would mean that for some time (some plans suggest 60-90 days) companies would be allowed to bring money back to the United States without paying taxes on it.
I don't like this idea.
My first problem is that some of the people pushing this idea in Congress are quick to push the concept of moral hazard in many other instances. This is a moral hazard as large as possible. Why? Because it isn't the first time that this idea has been considered and utilized. There have been plans like this previously. The central problem? You can't beat free.
Corporations are expected to spend as little money as possible and gain as much profit as possible. That means that they are constantly looking for a way of paying less taxes. That seems rather obvious, and is the reason that so much time and money is spent lobbying to get tax loopholes added and tax rates lower. As I discussed in a prior post, the vast majority of Americans have very, very simple tax returns. The often complained about complexity of the tax code is almost entirely from companies getting Congress to add loopholes and exemptions so they can pay less in taxes.
The tax code will never be able to compete with free. A one-time tax holiday will be a big boon for these companies to spend money on themselves. But it is not likely to increase jobs by a substantive amount. Why? Because as they themselves tell us, the determining factor for hiring is people buying. They will hire AFTER they cannot meet demand with existing staff. The problem there is that none of this money is going to average consumers - the ones who will spend it to motivate companies to hire in the first place.
Aside from not likely to actually create much in jobs, these same companies will resume the same activity after the holiday is over. As I said, you can't get cheaper than free (I won't get into the concept of negative effective tax rates). That means that so long as there is a place that these companies can conveniently funnel money to avoid taxes on it, while there is a tax rate in the US, these companies will shelter as much as they can overseas.
So, I have a compromise idea; means-tested repatriation. So, here's how my plan would work. Each company would be required to produce a plan that details how much they hold overseas, and how many jobs they will be able to create by way of repatriation of that money and how long it will take to create those jobs. These would need to be full-time jobs. Once the plan is approved, the company will be held liable for meeting that plan. If they fall short of creating the number of promised jobs in the promised time-frame, they will be financially liable for taxes on the money repatriated, proportional to the number of jobs short they are, at current tax rates (today's rates, not at the end of the contract).
The idea is that these companies are held liable for their claims; that if we the average citizens and taxpayers let them shirk the existing tax liability, they must deliver on their assertions. If they say they can create jobs, then that is what they must do, not simply pad executive bonuses or lavish money on company retreats. I think this is only reasonable.
An idea that has bounced around for a long time has been to have a "tax-holiday". For those unfamiliar with the idea, it's rather basic and simple - for a designated period of time, certain activities are not taxed. In this instance, it would mean that for some time (some plans suggest 60-90 days) companies would be allowed to bring money back to the United States without paying taxes on it.
I don't like this idea.
My first problem is that some of the people pushing this idea in Congress are quick to push the concept of moral hazard in many other instances. This is a moral hazard as large as possible. Why? Because it isn't the first time that this idea has been considered and utilized. There have been plans like this previously. The central problem? You can't beat free.
Corporations are expected to spend as little money as possible and gain as much profit as possible. That means that they are constantly looking for a way of paying less taxes. That seems rather obvious, and is the reason that so much time and money is spent lobbying to get tax loopholes added and tax rates lower. As I discussed in a prior post, the vast majority of Americans have very, very simple tax returns. The often complained about complexity of the tax code is almost entirely from companies getting Congress to add loopholes and exemptions so they can pay less in taxes.
The tax code will never be able to compete with free. A one-time tax holiday will be a big boon for these companies to spend money on themselves. But it is not likely to increase jobs by a substantive amount. Why? Because as they themselves tell us, the determining factor for hiring is people buying. They will hire AFTER they cannot meet demand with existing staff. The problem there is that none of this money is going to average consumers - the ones who will spend it to motivate companies to hire in the first place.
Aside from not likely to actually create much in jobs, these same companies will resume the same activity after the holiday is over. As I said, you can't get cheaper than free (I won't get into the concept of negative effective tax rates). That means that so long as there is a place that these companies can conveniently funnel money to avoid taxes on it, while there is a tax rate in the US, these companies will shelter as much as they can overseas.
So, I have a compromise idea; means-tested repatriation. So, here's how my plan would work. Each company would be required to produce a plan that details how much they hold overseas, and how many jobs they will be able to create by way of repatriation of that money and how long it will take to create those jobs. These would need to be full-time jobs. Once the plan is approved, the company will be held liable for meeting that plan. If they fall short of creating the number of promised jobs in the promised time-frame, they will be financially liable for taxes on the money repatriated, proportional to the number of jobs short they are, at current tax rates (today's rates, not at the end of the contract).
The idea is that these companies are held liable for their claims; that if we the average citizens and taxpayers let them shirk the existing tax liability, they must deliver on their assertions. If they say they can create jobs, then that is what they must do, not simply pad executive bonuses or lavish money on company retreats. I think this is only reasonable.
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