The Tax Holiday Road to Ruin

| Thu Jun. 23, 2011 2:38 PM EDT

Is there a more terrible idea getting serious play in policy circles than a corporate "tax holiday"? That's when corporations that have put off paying American taxes get a one-shot chance to move that money into the US at the steeply discounted rate of 5 percent. Kevin has dismissed the proposal as a "scam," but I wanted to point out a new Center for Budget and Policy Priorities report thoroughly dismantling the idea.

Proponents—like the WIN America campaign, a group backed by major pharmaceutical, energy, and technology corporations—claim a new tax holiday will "strengthen our economy, pay down our debt, put people back to work, and invest up to $1 trillion in America." But the last tax holiday, in 2004, did nothing of the sort, CBPP says. "The evidence shows that firms mostly used the repatriated earnings not to invest in US jobs or growth but for purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders," the report's authors write. "Moreover, many firms actually laid off large numbers of US workers even as they reaped multi-billion-dollar benefits from the tax holiday and passed them on to shareholders."

Here are three more solid reasons why tax holidays are a dumb idea, per CBPP:

  • Repeating the tax holiday would increase incentives to shift income overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future. That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.
  • The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious. U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959. The ten companies lobbying hardest for a new tax holiday alone have at least $47 billion in cash and other liquid assets that could be used for domestic investments—without triggering additional tax liability.
  • Some of the biggest beneficiaries of a tax holiday would be firms that have aggressively shifted income overseas. Companies in the technology and pharmaceutical industries have been particularly aggressive in shifting income abroad because they rely on intellectual property, which is relatively easy to shift to other countries as a tax avoidance strategy. Half of all repatriations from the 2004 tax holiday came from companies in these two sectors alone. The same corporations and sectors would stand to benefit disproportionately—and enormously—from a second tax holiday."

It seems that a tax holiday would have, in the long term, the opposite of its intended effect: it would encourage companies to shift cash out of the US. It's hard to see any upside whatsoever for American workers—or the American economy at all, really—from another tax holiday. That is, unless you're a member of Congress who depends on hefty campaign donations to stay in Washington. In that case, a tax holiday is exactly what the doctor ordered. I've even drafted a working title for such a piece of legislation: "The Keeping Corporations Happy and the Contributions Rolling In Act of 2011."

A mouthful, yes. Anyone else have a better name?

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