Unlike fine wine, bad ideas don’t improve with age.
One such idea is the Invest in Transportation Act, co-sponsored by Sens. Barbara Boxer (D-CA) and Rand Paul (R-KY), which would institute a temporary tax cut on profits brought back to the United States by American firms from their overseas operations and use the proceeds to fund investment in transportation infrastructure.
It sounds great. The US corporate tax rate is 35 percent, much higher than rates in other countries, which gives American companies an incentive to keep their overseas profits off-shore and out of the hands of the IRS. The Boxer-Paul proposal would provide firms with a limited-time offer: bring overseas profits home and pay taxes at the bargain rate of only 6.5 percent.
Everyone wins. Firms get to repatriate their profits, which can be used to invest in the United States and create jobs. The government collects more tax, since 6.5 percent of something is greater than 35 percent of nothing. And politicians get to put money into desperately needed transportation infrastructure without having to vote to raise taxes.
Unfortunately, we have been to this rodeo before and wound up with a few hoof-prints on our collective backside as a result.
A decade ago, the American Jobs Creation Act reduced the tax rate to 5.25 percent on profits repatriated by US companies during 2004 and 2005. Firms that took advantage of the law were required to use the windfall to invest in job-creating investment in plant and equipment and research and development.
But the law didn’t quite work out as advertised. A Senate report found that the 15 companies that benefitted the most from the law cut nearly 21,000 jobs and slowed the pace of their spending on research and development. Further, they estimated that the law cost the Treasury $3.3 billion dollars over the subsequent decade and called it “a failed policy.”
The Boxer-Paul proposal promises some of the same benefits that the American Jobs Creation Act did, namely that a portion of repatriated funds will be used for job creation, research and development, and investment in green technology. It also mandates—like the earlier law–that firms not use the repatriated profits to increase executive pay, dividends, or stock buybacks. However, an analysis by Jennifer Blouin and Linda Krull in the Journal of Tax Research concluded that firms that repatriated profits under the 2004 law, despite the legislation’s wording and the best efforts of the IRS, did use the proceeds to undertake share buybacks.
The prospect of bringing home profits from foreign operations is attractive. A recent report by Credit Suisse estimated that, as of 2014, S&P 500 corporations had parked more than $2 trillion in earnings overseas. Some of the largest offshore sums were held by General Electric ($119 billion), Hewlett-Packard ($43 billion), Baxter International ($14 billion), and Mattel ($6.4 billion). If all $2 trillion were brought home and taxed at 6.5%, the IRS would collect about $130 billion. Despite these impressive numbers, Washington should not be fooled by the false promise of a tax windfall.
Our transportation infrastructure is a mess. According to the most recent report by the American Society for Civil Engineers, more than 66,000 bridges in the United States are either structurally deficient or functionally obsolete and more than 210 million trips are taken over deficient bridges every day in America’s 102 largest metropolitan areas.
Instead of relying on a gimmick to fund urgently needed transportation infrastructure, our politicians need to deal with the issue head-on. Cut the budget elsewhere, raise taxes, or take advantage of historically low interest rates and borrow the money. None of these will be popular with voters, but they are preferable to the Boxer-Paul plan.
Our corporate tax code needlessly punishes American businesses and encourages all sorts of creative accounting to escape high US corporate taxes. Instead of instituting temporary tax holidays every ten years or so, Congress should reform the corporate tax code once and for all, allowing American firms to use their resources to conduct business instead of gaming the tax system.
You can’t make the same mistake twice. The second time you make it, it’s no longer a mistake. It’s a choice.
Featured image credit: Tioronda Bridge from the west, in disrepair, by Daniel Case. CC-BY-SA-3.0 via Wikimedia Commons.