Freeing Corporate Profits from Their Fair Share of Taxes Is Not the Deal America Needs
There’s obviously plenty to criticize regarding Donald Trump’s claims and characterizations about the problems facing the U.S. economy during last night’s debate. But one thing that stuck out clearly was his peddling the myth that profits of U.S. corporations are “trapped” offshore by U.S. tax policy, and that these profits “can’t” be returned to the United States “until a deal is struck.” Now, Trump’s presentation of this argument during the debate was a characteristic dumpster fire of incoherence, but on the substance he was actually just trying to explain what has become a depressing conventional wisdom.
So, let’s provide a quick explainer about why these profits are not “trapped” abroad and why the only deal that needs to be cut is closing a loophole in the U.S. corporate income tax.
This loophole allows U.S. multinational firms to defer paying the corporate income tax on profits earned overseas until these profits are “repatriated,” or returned to shareholders in the United States. By now, about $2.4 trillion in profits sits offshore, and there would be about $700 billion in taxes if it were repatriated. Obviously this deferral is a huge deal.
The first thing to note is that the only benefit to the U.S. economy of repatriating this money intentionally parked (not “trapped”) offshore is that taxes would be collected on it. Often claims are made that returning this money to the United States would spur faster economic recovery. Implicitly, this claim is made to argue that it would be worth doing almost anything to bring this money back to the United States. But this is wrong—there is no economic problem facing the United States that would be solved by bringing in a huge glut of savings to U.S. markets. In other historical times, maybe an increase in the supply of loanable funds would have helped the U.S. economy by driving down interest rates which would make borrowing and investing better deals for American consumers and businesses. But interest rates are already historically low in the United States, reflecting the fact that we already have too much savings relative to desired investment projects. Given that the only good bringing this money to the United States would do is increased tax revenue, cutting a deal that reduced the taxes collected on it should it be repatriated would be a dumb thing to do.
But, Trump’s dumb repatriation idea isn’t original. These deals to entice repatriation have happened in the past, and hopes for such a “repatriation holiday” deal are clearly one driving force keeping U.S. multinationals from bringing this money home and paying taxes on it.
This can be seen simply in how stubborn these companies have been in not returning this money to the United States. Since the law says they eventually do have to face the U.S. corporate income tax, what’s the point in multinationals deferring this tax and keeping profits offshore? One small reason is simply that money today is worth more than money tomorrow, so deferring taxes makes sense. Another way to understand this is that multinationals can earn interest on their stock of deferred profits while they wait to pay taxes. But the much more important reason is that they are obviously waiting for some group of politicians to offer them a holiday to bring home this money home at a gift rate. And it’s not an irrational hope. Congress did exactly this in 2004, passing a repatriation holiday that allowed firms to bring home earnings and face only a 5 percent tax (instead of the 35 percent statutory rate). The promised economic boom never came, but tax revenue was lost.
So, when Donald Trump screams about needing to “strike a deal” to help these “trapped” profits, all he really means is that we need to give corporations a huge tax cut. Sadly, even Hillary Clinton referred to offshore profits as “stranded.” To be clear, U.S. multinationals are not afflicted with profits that are “stranded” or “trapped” and no deal is needed to free this money. Instead, these multinationals just need to pay their taxes. Congress needs to close the loophole that lets them defer taxes just because they booked profits somewhere besides the United States.
Let’s end with an analogy. Every dollar your employer pays you triggers a tax liability for them (the employer-side of the FICA taxes that fund Social Security and Medicare). Imagine one day your employer came to you and said that they’d love to pay you your salary, but, sadly, the money is “trapped” because if they did pay, they’d then owe taxes. Would you find this a compelling argument? Or would you tell them to shut up and pay their taxes? If the latter, then this is how you should greet Donald Trump’s bellowing that we need to cut a deal to help U.S. corporations bring their money home.
© 2016 Economic Policy Institute