My experience in policy making has led me to try to strictly obey a couple of basic precepts. First, keep it simple. Unintended consequences abound, and the more tweaks you have to build in to get the policy to do what you really want it to do, the more likely something will go wrong.
Second, it's better not to pass a bad policy than to try to make it good. Why not? See rule #1 above.
These caveats come to mind in thinking about the tax repatriation holiday that's getting some buzz in these circles. This is where you let multinational corporations who've been "deferring" taxes they owe to the Treasury -- holding them overseas -- get a time-limited break to bring them back (to "repatriate" them) at a much reduced rate (5%!!). See here and here.
The core of the critique is that while the corporations who take advantage of this claim they'll invest the tax windfall and create more jobs, the evidence shows otherwise (we tried this before, back in 2004). Over to my CBPP colleagues Chuck Marr and Brian Highsmith:
- A tax holiday enacted in 2004 failed to produce the promised economic benefits. The evidence shows that firms mostly used the repatriated earnings not to invest in U.S. jobs or growth but for purposes that Congress sought to prohibit, such as repurchasing their own stock and paying bigger dividends to their shareholders. Moreover, many firms actually laid off large numbers of U.S. workers even as they reaped multi-billion-dollar benefits from the tax holiday and passed them on to shareholders.
- 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 have1.9 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 least47 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.
Lately, some folks have suggested ways to make this bad idea work better by assigning any revenues from it to infrastructure projects or by making receipt of the windfall conditional on new hires. Note that this is already highly dubious because the damn thing scores as adding $80 billion to the deficit over 10 years -- so, like, where's the "new revenue?"
Those ideas violate both of the policy rules. I can easily imagine legislation that ends up saying essentially, "OK -- for every gazillion dollars you repatriate, you have to create one part time job that has to last at least 20 minutes." Plus, why do we want a hiring credit that only applies to multinationals that squirrel their profits away overseas? For that matter, why do we want to advantage these firms relative to our wholly domestic ones?? Why, I ask you??!!
Nor can you fund infrastructure projects, or capitalize an infrastructure bank, as some have suggested, on a program that costs the Treasury billions. You wanna to build infrastructure? Me too. Raise the money and let's do it.
I've got a good simple idea that solves all of the above, at it's one we proposed during my time in the Obama Administration. No more deferral of taxes on overseas profits. Boom!... problem solved.
This post originally appeared at Jared Bernstein's On The Economy blog.