Repatriation Tax Break Study Challenges Official Cost Estimate

Posted by Brian Patrick on

FYI –

  • “We find that the JCT’s approach has been flawed conceptually and its estimates of significant revenue losses are incorrect,” wrote Robert Shapiro, who was a Commerce Department official in the administration of President Bill Clinton, and Aparna Mathur, a resident scholar at the American Enterprise Institute, a Washington-based policy group that favors limited government.
  • The tax break for repatriating overseas profits sought by Cisco Systems Inc., Google Inc. and other U.S.-based multinational companies would raise $8.7 billion for the federal government over the next decade, according to an estimate by two economists. ... The companies, backed by lawmakers including U.S. House Majority Leader Eric Cantor of Virginia, support a plan that would allow them to bring profits home at a 5.25 percent top tax rate, compared with the current top rate of 35 percent.
  • Some Democrats, including Senators Charles Schumer of New York and Kay Hagan of North Carolina, have expressed a willingness to consider a repatriation holiday.

Repatriation Tax Break Study Challenges Official Cost Estimate
Bloomberg
Richard Rubin
August 25, 2011 11:36AM ET

(Bloomberg) -- The tax break for repatriating overseas profits sought by Cisco Systems Inc., Google Inc. and other U.S.-based multinational companies would raise $8.7 billion for the federal government over the next decade, according to an estimate by two economists.

The estimate, released by NDN, a research group in Washington that typically aligns with Democrats, challenges the official estimate by the congressional Joint Committee on Taxation. That nonpartisan group projected that a repatriation tax holiday would cost the U.S. government $78.7 billion in forgone revenue over the decade.

“We find that the JCT’s approach has been flawed conceptually and its estimates of significant revenue losses are incorrect,” wrote Robert Shapiro, who was a Commerce Department official in the administration of President Bill Clinton, and Aparna Mathur, a resident scholar at the American Enterprise Institute, a Washington-based policy group that favors limited government.

The new estimate adds to the political discussion and the lobbying frenzy surrounding a proposal for a repeat of the 2004 repatriation tax holiday. The companies, backed by lawmakers including U.S. House Majority Leader Eric Cantor of Virginia, support a plan that would allow them to bring profits home at a 5.25 percent top tax rate, compared with the current top rate of 35 percent.

Unlike most industrialized countries, the U.S. requires companies to pay taxes when they bring profits home. Multinational companies including Qualcomm Inc. and Apple Inc. maintain that the tax system inhibits domestic investment.

Tax Holiday

Some Democrats, including Senators Charles Schumer of New York and Kay Hagan of North Carolina, have expressed a willingness to consider a repatriation holiday. The Obama administration opposes the idea.

The difference between the two studies turns in part on the extent to which a tax holiday would induce companies to accelerate repatriation of profits they would otherwise return to the U.S. in the future. The bigger that time shift, the less long-term revenue for the government, the studies found.

In the NDN report, Shapiro and Mathur note that corporate repatriation spiked after the 2004 holiday was enacted and then returned to levels in line with the pre-holiday trend in 2007 and 2008.

The JCT estimate, released earlier this year, contended that the U.S. government would lose money over the long term after a second holiday. That’s because companies, particularly those with the ability to move profits to low-tax countries, would keep more money offshore in anticipation of another round of tax breaks.

“If firms anticipate that future repatriation of foreign earnings to meet such needs could occur with little U.S. residual taxation, firms would be less constrained in their location decisions,” JCT chief of staff Thomas Barthold wrote.
 





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