It has become clear that this Congress is not going to be one that passes fundamental tax reform. Anything that would pass the Democrat Senate or be acceptable to President Obama would be a net tax increase, and that is unacceptable to the House of Representatives and their 237 Taxpayer Protection Pledge signers. Attempts thus far at tax reform — the Simpson-Bowles commission and “Gang of Six” efforts come to mind — have been tax increases disguised as rate-cutting tax reform. Nevertheless, that does not mean that a significant opportunity isn’t there on an aspect of fundamental tax reform — namely, doing another round of low-tax repatriation of foreign corporate profits.
Back in 2004, Congress passed a bill that allowed corporations to bring back to the United States after-tax dollars earned in other countries relatively tax-free. Rather than having to pay the IRS the difference between the foreign country’s tax rate and our own 35 percent rate (the highest in the developed world), companies choosing to bring profits back to the United States would only have to pay the IRS a maximum tax rate of 5.25%.
This “repatriation holiday” was in effect for all of 2005. The result was that at least $320 billion of money was brought back to the United States. This increased corporate tax revenue by nearly $17 billion — tax revenue that otherwise would have been indefinitely deferred into the future. The money was used to fund pension plans, raise wages, create jobs, and invest in new plants and equipment.
Today, multiple press reports indicate that over $1 trillion is sitting overseas right now, waiting for similar or better tax treatment to come home. If even half this money was repatriated (about the same ratio as happened in 2005), that implies another repatriation round would yield the United States over $500 billion of new capital — almost literally out of the sky.
Protectionists and those who think all foreign economic activity is somehow suspect should be in favor of this. We can sell products and services to foreigners, and not even let their countries benefit by having the profits parked in their banks. We’d bring that money right back here to the United States. Liberals should like it for the same reason (even Andy Stern, former head of the SEIU, is for repatriation). Inflation hawks should like this because it is capital without the Federal Reserve having to print any more money. Unions should like this because it’s a ready source of funding pension plan obligations. Investors should like this because it will immediately free up other capital for dividends and should raise stock prices on an after-tax basis. Put simply, it’s a win-win.
The money would be used for similar purposes as it was in 2005, with the added benefit of being able to pay down some of the bad debt that the financial crisis forced onto corporate balance sheets. Jobs would be created, wages and benefits would rise, and there would be less pressure to raise prices on goods and services.
Why would the same Democrat senators and Democrat president who oppose fundamental tax reform go for this idea? The answer can be found in the December 2010 deal on not raising tax rates. As part of that deal, President Obama (not Congressional Republicans) insisted on including a year of full business expensing of capital equipment (in lieu of depreciation). This is a thoroughly supply-side idea, one that the Right has been pushing since the 1970s. Obama insisted on it for nationalist, Keynesian, industrial planning reasons — he wanted a surge of fixed business investment in the lead-up to his re-election bid. He can be for another round of repatriation for the same reason: “Large multi-national companies should bring that money home here to (insert campaign stop), to create jobs for American workers. That’s why I insisted on a repatriation opportunity for America’s large employers.” You don’t need everyone pushing the cart in the right direction to have the same motivation for doing so, provided the cart gets to where you all agree it should get to.
Corporate America should be for this for a reason beyond the obvious. It’s been a concerted tactic of President Obama and Congressional Democrats to expose foreign earnings to immediate international double taxation. It’s their favorite “pay for” for every bill, and it appears in every budget. Corporations should want another round of repatriation to get this money out of the sight-lines of the Left’s tax collectors.
Another round of repatriation is the second big tax idea that can happen between now and the 2012 election (the other being full business expensing, which should become a permanent part of the code). After 2012, when there is probably a GOP Senate and hopefully a president who agrees on real tax reform, we can again return to a comprehensive discussion. But there is no reason not to move now on what can be accomplished sooner.
Grover Norquist is president of Americans for Tax Reform.