Conservative group skeptical of corporate tax holiday

A prominent conservative group is highly skeptical that a corporate tax holiday would give the U.S. job market a jolt, as supporters of the idea claim.

The Heritage Foundation, in a study to be released Tuesday, questions whether allowing U.S. multinationals to repatriate offshore profits here at a reduced tax rate would spur domestic investment.

The paper argues that companies aren’t currently strapped for capital — meaning that, while companies would certainly take advantage of a tax holiday, the influx of funds might not be earmarked to expand operations.

“Any investment, any action that they would deem worthwhile today can and is being financed out of current and accumulated earnings,” the group’s J.D. Foster and Curtis Dubay write in the study. “In those rare instances in which outside financing is needed, interest rates are at historic lows and few if any of these repatriating companies are constrained.”

Foster and Dubay do want the U.S. to move to a so-called territorial tax system, as do many in the business community. But Foster and Dubay also doubt that a repatriation holiday would lay the groundwork for a territorial system, in which companies would essentially only be taxed on profits made within the U.S.

The foundation’s paper comes as some corporate heavyweights — like Apple, Cisco, Google and Oracle — push hard for another tax holiday, after Congress enacted a similar sort of idea roughly seven years ago.

Lawmakers from both parties have expressed support for a sequel to the holiday enacted in 2004, which allowed multinationals to bring profits to the U.S. at a 5.25 percent tax rate. The current top corporate rate is 35 percent.

But the Heritage Foundation paper could blunt the push for another holiday, whose backers include House Majority Leader Eric Cantor (R-Va.) and Rep. Kevin Brady (R-Texas), a senior member of the tax-writing House Ways and Means Committee.

In an interview, Foster said that he had seen no evidence that the 2004 holiday was much of a boost for job creation, with studies having shown that most repatriated funds were used for dividend payments or stock buybacks.

“The evidence clearly shows that these repatriated earnings did not increase domestic investment, job creation or research and development as advertised,” Foster and Dubay wrote in the paper.

Foster also said policymakers’ time would better be spent switching the U.S. to a territorial system or lowering the overall corporate tax rate. And in the paper, Foster and Dubay appear skeptical of the argument that enacting a temporarily reduced tax rate could act as a bridge to a territorial system. 

The two Heritage officials argue that, while a repatriation holiday deals with past decisions, a territorial system is more forward-looking.

“Time travels in only one direction: Reducing the tax today cannot affect past decisions,” they write. “The key to improving economic performance lies with future decisions, not past consequences.”

Still, holiday advocates continue to press the case that bringing offshore funds to the U.S. would do more for domestic investment than if they’re left abroad.

The WIN America Campaign, the lobbying coalition supported by the corporate giants, argue that a new holiday would lure back much of the $1 trillion that multinationals have stashed abroad.

And Douglas Holtz-Eakin, an economic adviser to John McCain’s 2008 presidential campaign, has authored a study asserting that a new holiday could create as many as 2.9 million new jobs.

In an interview, Holtz-Eakin, also a former director of the Congressional Budget Office, declared that, even if repatriated funds were used for stock buybacks, the money would eventually funnel back into the economy.

Holtz-Eakin also called the issue of whether the U.S. switches to a territorial system more of a political question.

The Heritage Foundation study, he argued, was “incomplete economics supported by questionable political science.”