GOP Rewards Corporate Tax-Dodgers by Repatriation

The various Republican tax plans generally grant a huge tax break to corporations for returning their vast stockpiles of cash held overseas back into the United States, often referred to as “repatriation.”

The theory is that corporations would just love to bring back this money and put it to good use by investing it in America to create jobs (a dubious premise in itself), but the problem is that this money would be taxed upon entry into the United States at the standard U.S. corporate tax rate of 35 percent, which is higher than the foreign tax havens where the money is now parked. To address this problem, the logic goes, the U.S. should lower its tax rate on money repatriated into the U.S. to encourage corporations to bring it back onshore.

The amount of this money is staggering. Estimates indicate that U.S. companies are now sitting on as much as $2.6 trillion in overseas stockpiles.

But hold on a second. Something doesn’t seem quite right. We seem to be rewarding bad behavior here.

The reason these American corporations accumulated such vast piles of cash overseas in the first place is due to tax-dodging. They hired high-priced accountants and lawyers to devise byzantine schemes to avoid paying taxes in the United States.

The response from Congress in its infinite wisdom is to grant a huge tax reduction for these corporations. The current corporate tax rate is 35 percent, and under the GOP proposals, the Senate would reduce the rate for repatriations to 10 percent, a whopping 71 percent tax cut, and the House would reduce the rate to 14 percent, a 60 percent tax cut. This is quite an extraordinary corporate giveaway.

The offered explanation is that a lower tax rate is necessary to induce the corporations to bring their money back into the United States. And the nation would be better off collecting a lower tax revenue from this reduced rate than collecting no tax revenue at all by the money never being returned into the United States.

Has Congress fallen down the rabbit hole? Just think about the perversity of this logic. Apply it to, say, a thief who steals a truckload of new iPhones. Should the law be that if the thief returns some of the iPhones then he may keep all the rest of the iPhones for himself? After all, it would be better to recover some of the iPhones than none at all.

Of course not. Law enforcement would demand the return of every single stolen iPhone. And on top of that, the law would punish the thief for stealing the iPhones in the first place with a financial penalty over and above the recovery of the iPhones and perhaps even a little time in the clink for good measure.

Otherwise, the law would create a perverse incentive for potential wrongdoers. This is exactly the problem with the current repatriation proposals.

Just imagine the decision-tree for CEO’s all across the nation when contemplating whether to dodge their corporate taxes: “If I do not get caught, then I will keep every penny of my tax avoidance. And if I do get caught, well, then I’ll only be required to return some of my ill-gotten gains and I’ll be able to keep the rest.”

So, tax-dodging is all upside with no downside. Why wouldn’t corporations dodge their taxes?

This is not exactly a desirable outcome.

Instead, Congress must shape-up here and follow the basic principle of sound tax policy of the carrot and the stick. Good behavior should be rewarded with a yummy carrot, and bad behavior should be discouraged with a painful stick.

Dodging taxes is bad behavior. So, tax-dodgers should not be rewarded with the carrot of a lower tax rate, but instead should feel the sting of the stick.

Many possible solutions are available. One potential solution would be that all money repatriated within one year will simply be taxed at the standard rate of 35 percent, as it should have been at the time it was earned. Any funds not repatriated within one year, however, will be assessed a higher charge of 50 percent.

Instead of rewarding corporations with a lower rate for their tax-dodging, we should react in the exact opposite manner and send corporate board rooms a clear message that bad behavior will result in unpleasant consequences.

Corporations obviously need a little discipline to help them do the right thing. Now it is up to Congress to provide it.

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