GOP bets that tax bill will unlock corporate cash overseas

Republicans and major technology firms who support a tax overhaul have touted reforms that they say will bring offshore profits back into the country, boosting U.S. tax revenue and benefiting the economy.

But critics are skeptical of those claims, doubting that both the House and Senate versions of the tax bill give companies like Apple the incentive to bring money into the U.S. over the long term.

One of the central pieces of the Republican plan is a one-time lower rate on foreign income repatriated to the United States. 

Under the House bill, foreign companies could pay a 7 percent rate on repatriated illiquid assets and a 14 rate on repatriated cash or assets that are easily convertible to cash, while the Senate rates would be 5 and 10 percent, respectively.

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The repatriation would be paired with a dramatic cut in the corporate tax rate to 20 percent and a shift to a territorial tax system, two things corporations have long asked for.

Sen. Chuck Grassley (R-Iowa), who sits on the Senate Finance Committee, said he believes the GOP’s tax reforms will not only bring earnings back onshore, but also attract “a lot of foreign investment” to the U.S. from overseas.

But Democrats and tax experts question why U.S. companies would continue bringing profits back to the U.S. once the lower rates for repatriation expire.

Sen. Tom Carper (D-Del.), another Finance Committee member, told The Hill repatriation is “a big one-time” fix that won’t stop companies from storing earnings offshore.

“It’s not a long-term solution to lowering the rates,” Carper said.

Republicans say that they’re not concerned, arguing that the permanently reduced corporate tax rate will keep corporate dollars flowing back home.

“I would think that everybody would want these companies to bring the money back here to hire more workers and create more jobs in America,” Senate Majority Whip John Cornyn (R-Texas) told reporters last Wednesday. 

When pressed about what happens following repatriation, Cornyn said, “That’s where the 20 percent corporate rate comes in.” 

Tax experts question whether the 20 percent rate will be enough to bring money back onshore. While the 20 percent rate is lower and more attractive to corporations than the current 35 percent rate, it’s still not lower than the single-digit corporate rates firms are currently able to pay using complex tax havens and accounting maneuvers.

As of 2015, Apple was able to pay a 2.3 percent tax rate on its offshore profits, by one estimate from liberal-leaning Citizens For Tax Justice. That rate is disputed, but most agree that the company’s tax rate generally sits somewhere in the single digits — far below the 20 percent they’d pay under the proposed system. 

One additional incentive for tech companies under the Republican plan is a tax break on profits from intellectual property. That break will likely spur the return of some profits to the U.S., but Eric Toder, co-director of the Urban-Brookings Tax Policy Center, notes that “they can’t do that with all their [intellectual property], so they’ll keep some … overseas.” 

Lawmakers are also proposing a reduction of the tax credit on profits earned abroad, regardless of whether they’re brought home or not. Companies currently get a 100 percent tax credit on income earned abroad, which would fall to around an 88 to 90 percent credit under the legislation (the House and Senate versions differ). This would mean that companies would have to pay a 10 or 12  percent tax on overseas profits regardless of where the money is stored.

Despite this, “it’s still advantageous to book income overseas,” Toder noted while speaking with The Hill. 

“Ten percent is still worth getting up and doing it,” agrees Marty Sullivan, an economist at the nonpartisan research group Tax Analysts. “There will still be profit shifting.”

“If one of these companies can make hundreds of millions of dollars by hiring a tax attorney for one million, they’re going to do it,” he added.

Even if repatriation does succeed in bringing back some corporate dollars stashed overseas, observers are skeptical that it will result in a giant windfall for the Treasury and the economy. 

Their pessimism is rooted in the most recent test case that the U.S. has for repatriation: a 2004 repatriation tax holiday in which corporations were granted a temporary low 5.25 percent tax rate to bring income earned overseas stateside.

“If you look at 2004, when we tried carte blanche repatriation, it didn’t lead to more jobs. It lead to stock buybacks or paying out larger dividends,” Rep. Ro Khanna (D-Calif.) told The Hill. His district includes tech companies like Apple. 

Researchers at the conservative Heritage Foundation in 2011 released an analysis finding that there were meager to nonexistent gains from the 2004 tax holiday. They cited National Bureau of Economic Research numbers that found a “$1 increase in repatriations was associated with a $0.60–$0.92 increase in payouts to shareholders,” but found no positive impact on job creation and domestic investment. In the analysis, they concluded that another similarly styled tax cut would not be advisable.

“The repatriation holiday would have little or no effect on investment and job creation, the key to the whole issue, simply because the repatriating companies are not capital-constrained today,” Heritage tax fellows Curtis Dubay and J.D. Foster wrote.

By capital-constrained, Dubay and Foster mean that large firms like Apple, Pepsi and Google already have large amounts of cash sitting in the U.S. that they’re not spending. Allowing them to bring in more cash more easily doesn’t give them a reason to boost domestic spending and investment.

Following the 2004 tax holiday, firms instead raised dividends, boosted executive compensation and increased buybacks of their shares which, when all else is equal, raises a company’s stock value. 

“All that [repatriation is] going to do is lead to perhaps the appreciation of these companies’ share prices,” Khanna said.

“I don’t think that just having repatriation at a lower tax rate will have any linkages to investment in communities left behind or job creation,” Khanna added. “It’s going to do nothing in terms of creating jobs and prosperity for communities left behind.”