Repatriation Tax Break Study Challenges Official Estimates

The tax break for repatriating overseas profits sought by Cisco Systems Inc. (CSCO), Google Inc. (GOOG) and other U.S.-based multinational companies would raise $8.7 billion for the federal government over the next decade, according to an estimate by two economists.

The estimate, released by NDN, a research group in Washington that typically aligns with Democrats, challenges the official estimate by the congressional Joint Committee on Taxation. That nonpartisan group projected that a repatriation tax holiday would cost the U.S. government $78.7 billion in forgone revenue over the decade.

“We find that the JCT’s approach has been flawed conceptually and its estimates of significant revenue losses are incorrect,” wrote Robert Shapiro, who was a Commerce Department official in the administration of President Bill Clinton, and Aparna Mathur, a resident scholar at the American Enterprise Institute, a Washington-based policy group that favors limited government.

The new estimate adds to the political discussion and lobbying frenzy surrounding a proposal for a repeat of the 2004 repatriation tax holiday. The companies, backed by lawmakers including U.S. House Majority Leader Eric Cantor of Virginia, support a plan that would let them bring profits home at a 5.25 percent top tax rate, compared with the current top rate of 35 percent.

Domestic Investment

Unlike most industrialized countries, the U.S. requires companies to pay taxes when they bring profits home. Multinational companies including Qualcomm Inc. (QCOM) and Apple Inc. (AAPL) maintain that the tax system inhibits domestic investment. The JCT projects that a tax break would cause companies to repatriate about $700 billion.

Some Democrats, including Senators Charles Schumer of New York and Kay Hagan of North Carolina, have expressed a willingness to consider a repatriation holiday. Many Democrats who are considering supporting repatriation have said they want to have some provision in the bill that would encourage or require companies to create jobs.

The Obama administration opposes the idea. Administration officials have pointed to job cuts made by companies that repatriated profits during the past tax holiday.

Time Shift

The difference between the two studies turns in part on the extent to which a tax holiday would induce companies to accelerate repatriation of profits they would otherwise return to the U.S. in the future. The bigger that time shift, the less long-term revenue for the government, the studies found.

In the NDN report, Shapiro and Mathur note that corporate repatriation spiked after the 2004 holiday was enacted and then returned to levels above the pre-holiday trend in 2007 and 2008.

International growth by U.S.-based corporations generated profits outside the country, and companies needed to bring that money home, Shapiro said in a phone interview.

“Whatever the cause, you don’t see the decline that Joint Tax relied on for its revenue cost,” he said.

The JCT estimate, released earlier this year, contended that the U.S. government would lose money over the long term after a second holiday. That’s because companies, particularly those with the ability to move profits to low-tax countries, would keep money offshore in anticipation of another round of tax breaks.

‘Less Constrained’

“If firms anticipate that future repatriation of foreign earnings to meet such needs could occur with little U.S. residual taxation, firms would be less constrained in their location decisions,” JCT chief of staff Thomas Barthold wrote.

Edward Kleinbard, the former JCT chief of staff, said in a phone interview today that the NDN study doesn’t consider that the higher repatriations from 2007 and 2008 may have been lightly taxed. That can happen because companies are able to bring home profits along with foreign tax credits from countries with relatively high income taxes. He said the study also ignores research showing that companies replenished their overseas earnings after the first tax holiday and increased those holdings.

“The only question is: Will companies pay the tax that was part of the ground rules when they salted the money away in tax havens?” said Kleinbard, a law professor at the University of Southern California. “Or will they be excused from one of the fundamental ground rules?”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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