The Weird Logic Of The Tax Repatriation Holiday

The negotiations over payroll tax extension are prompting a flurry of new lobbyist-written studies of the idea of a coprorate income tax repatriation holiday. Enthusiasm for this idea has spilled beyond all partisan boundaries as we saw in today’s Politico Morning Money where we learned of a “Democratic backer of a repatriation holiday” (probably a lobbyist) citing studies from “former Clinton official Robert Shapiro” (here) and “former JCT staffers” (here) arguing that such a move would actually raise revenue, contrary to analysis from the actual Joint Committee on Taxation.

Suffice it to say that you should always be suspicious of theories that tax cuts are going to raise revenue, and big government liberals are simply refusing to acknowledge that point for no reason. Here’s what’s going on, broadly speaking. Right now, US-based firms that earn profits abroad will have to pay corporate income tax on money earned abroad if they bring into the United States. They would prefer not to pay those taxes, so they want the tax holiday. The revenue issue is, in my view, a red herring here. It all exists around modeling assumptions about what firms will do in the absence of a holiday. If you assume that there’s some pool of money that will never be repatriated in the absence of a holiday then you can generate scenarios in which this is a revenue-positive move. You can also monkey around with time horizons and scoring windows. The basic qualitative point, however, is that you get some some kind of short-term boost (because money flows into the United States) at the long-term cost of firms becoming ever-more-reluctant to repatriate and pay their taxes in the future. But since in the short term we should be borrowing more money not less, there’s no reason to worry about whether the short-term revenue boost is quantitatively larger than the long-term revenue loss. In the short-term, we don’t need the revenue but in the long-term we will need it, so trading off more revenue today for less tomorrow is a bad deal.

More interesting is the question of economic impact. The credible theory here as to how a repatriation holiday will stimulate the economy is that firms will bring money back to the United States and then pay it out in the form of dividends or share buy-backs. That’s all well and good, but note that this is basically the most regressive stimulus you can imagine. We have a lot of income inequality in the United States but much more inequality in stock ownership. So the money will flow in from abroad to corporate coffers and then out into the hands of the wealthiest Americans. Questions of social justice aside, since the rich have a lower marginal propensity to consume than the poor you get extremely little stimulus bang for your buck this way. When Doug Elmendorf evaluated 13 different options for stimulating the economy (PDF) the CBO found repatriation to be unambiguously the least-effective option. All other forms of business tax cuts look better, as do all forms of cutting taxes on households and individuals. Now it may be that this is just where we are as a society. Maybe the rich and powerful are so rich and so powerful than the only politically acceptable way to stimulate the economy is to hand them dump trucks full of money. Responsible people should be looking at the impact of a repatriation holiday in some kind of comparative context, but it does seem to be true that if you ignore all other options for stimulating the economy that this looks like something that works. Unfortunately, there’s not nearly as much money to be made in doing studies of the impact of giving money to poor people or providing relief to debt-constrained middle class homeowners.