Point of View

Reward for bad behavior

October 11, 2011 

— Every parent knows that rewarding a child's bad behavior simply encourages more misbehavior down the road. Unfortunately, U.S. Sens. Kay Hagan, D-N.C., and John McCain, R-Ariz., seem to have forgotten this lesson. At the very moment in which thousands of people have taken to the streets to protest unrestrained corporate greed and malfeasance, the two have introduced a bill that would reward - and encourage - even more bad behavior by U.S.-based multinational corporations.

The likely results: fewer jobs, reduced domestic investment, higher federal deficits and more aggressive abuse of offshore corporate tax havens.

Current U.S. corporate tax law allows multinational corporations to indefinitely defer paying taxes on profits earned by foreign subsidiaries until those profits are brought back home (i.e. "repatriated") to the U.S.-based parent corporation. In practice, the ability of corporations to defer paying taxes on overseas income provides a major incentive for multinational corporations to invest overseas and to engage in aggressive tax-avoidance schemes to divert profits earned here into offshore tax havens.

Back in 2004, lobbyists for major multinational corporations sought to take advantage of this deferral loophole by selling members of Congress on the idea of a one-time "repatriation" holiday that would allow corporations to bring hundreds of billions of dollars in overseas profits at a reduced corporate tax rate just over 5 percent instead of the normal corporate tax rate of 35 percent. In return, corporations promised to use the repatriated profits to increase domestic investment and create jobs across the country.

Unfortunately, but not surprisingly, the end result was very different from what was promised.

Although corporations did take advantage of the opportunity of a near-amnesty on corporate taxes to repatriate more than $360 billion in profits, independent economic studies have shown that corporations overwhelmingly did not use the repatriated profits to increase investment or hiring. A study by the National Bureau of Economic Research found that almost all repatriated profits were used to finance payouts to corporate shareholders.

With their recently introduced Foreign Earnings Reinvestment Act, Hagan and McCain would resurrect this failed idea in the hopes of reducing the country's stubbornly high unemployment. Hagan and other proponents have argued that the economy is different now than in 2004 and that this time will be different. But with non-financial corporations already sitting on nearly $2 trillion in cash and other liquid assets, there's even less reason to expect that they'll use money from an enormous windfall from overseas profits to invest in creating jobs.

Furthermore, rewarding corporations for repatriating overseas profits would serve to encourage even more offshoring of corporate investment and more abuse of foreign tax havens. Allowing a repatriation holiday for the second time in only seven years demonstrates to multinational corporations that Congress will provide what amounts to a virtual tax amnesty for overseas profits whenever there's an economic downturn. Confident in the belief that another amnesty will surely be forthcoming, corporations would have even more incentive to shift income and profits overseas once the repatriation holiday is over.

That's why even members of Congress who supported the original 2004 tax repatriation holiday stressed the importance of it being a one-time event. That's also why the nonpartisan Congressional Joint Committee on Taxation projects that a corporate repatriation holiday would increase federal deficits by nearly $80 billion over the next 10 years. It also helps to explain why the top 20 corporations participating in the 2004 repatriation, likely in anticipation of another repatriation holiday, have almost doubled the amount of profits held overseas compared to 2003.

Instead of encouraging more overseas investment and more abuse of offshore tax havens, Hagan and other members of Congress should focus on reforming the corporate tax system to remove the incentives for moving income and investments overseas.

Instead of rewarding bad behavior, Congress should encourage good behavior by limiting or eliminating the ability of U.S.-based corporations to indefinitely defer paying taxes on corporate profits held overseas. Taking this step would actually raise revenue and reduce unwanted bias in the corporate tax code in favor of foreign investment. The result would be more domestic investment and more jobs in the United States and in North Carolina.

Let's hope that in the days ahead Hagan and McCain take a look at the Occupy Wall Street movement to see what millions of Americans really think about rewarding corporate misbehavior. If they do, they might just think twice about encouraging even more of it.

Edwin McLenaghan is a public policy analyst at the N.C. Budget and Tax Center.

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