Imagine for a minute how you’d feel if you found out that Congress passed a law that would allow your neighbor to pay less tax than you – a lot less tax than you – simply because they waited so long to do it.
That’s exactly what a measure introduced this week by Rep. Kevin Brady (R-TX) would do for corporations. The new legislation would allow U.S. corporations holding money offshore to repatriate those funds at a reduced tax rate. A seriously reduced tax rate. If the law were to pass (insert choking noises here), the tax rate would be reduced from the statutory rate of 35% to a special rate of 5.25%. That represents an 85% cut.
Okay, it’s not exactly the same as my example. But you get the idea.
For years, multinational companies have been able to – completely legally – stockpile cash in their offshore coffers without paying U.S. tax. There’s no way to tell exactly how much cash has escaped taxation to date but estimates have climbed as high as $1 trillion.
Now, those companies – like Apple – are increasingly interested in bringing that money to the U.S. What they aren’t interested in is paying the tax associated with repatriating it.
For quite a bit now, there have been whispers about creating a “holiday” that would allow those companies to do just that. The idea first attracted public attention when it was tossed around by such legislative luminaries as Rep. Eric Cantor (R-VA) and Sen. Orrin Hatch (R-UT). In the midst of a budget crisis, though, it didn’t get much play. Democrats, as a rule, wouldn’t get behind legislation that would be viewed as catering to big business at the expense of individual taxpayers while Republicans found it difficult to balance severe tax cuts with reducing the deficit. So, the chatter went silent for a bit.
Only it wasn’t completely silent. Behind the scenes, companies like Microsoft and Google were lobbying for the holiday to be pushed through. Even the notoriously apolitical Apple weighed in on the measure, retaining the lobbying firm of Fierce, Isakowitz and Blalock in Washington, DC to cozy up to Congress. After months of maneuvering, those companies finally got a break. Congress figured out how to propose a massive tax cut proposal and have it sound good for individual taxpayers: make it about jobs. No, not Steve Jobs. Real jobs.
Rep. Brady said about the bill:
This is about creating jobs, expanding U.S. businesses and strengthening American companies.
I can practically hear the Star Spangled Banner in the background, can’t you?
But here’s the problem with that logic: it’s not necessarily true. You see, the repatriation tax is nothing new. We’ve been there, done that before. In 2004, Congress passed a similar law. A study by the Center on Budget and Policy Procedures showed that $315 billion in earnings were repatriated under the 2004 holiday and yet, the results were not as hoped. Instead of using the money for job creation, most companies used the money to pay dividends or buy back stock. For example, Pfizer, which repatriated the most money under the 2004 holiday laid off a massive amount of U.S. employees just after the holiday (about 3,500 jobs) and closed factory doors. Other companies that took advantage of the holiday and subsequently laid off scores of employees include Merck, Hewlett-Packard, Ford and Pepsi.
The authors of the new bill anticipated criticisms from what were perceived as significant failures under the 2004 holiday. The proposed bill for 2011 includes a disincentive for layoffs. Companies that take advantage of the holiday and then cut their workforce would face tax bumps of about $8,750 per employee.
Meh.
Better than nothing, right? But from a dollars and cents perspective, if you could get rid of a $50,000 employee for less than $10,000, would you do it? As a business owner, I’ll willing to say that, from a purely economic standpoint, it’s a no brainer.
You can probably guess this won’t be an easy bill to push through Congress, at least not without some fairly intense concessions.
Complicating matters, the Obama administration openly opposes the idea of a repatriation holiday. Additionally, key Democrats and Republicans have each expressed reservations about the holiday, albeit for differing reasons, voicing instead suggestions for a complete overhaul of the Tax Code, not exactly a small feat. With all of the controversy surrounding the proposals, I think we can count on at least certainty: the only secure jobs to come out of this discussion will be those belonging to the lobbyists.
