Corporate Tax Holiday is a Bad Idea…well, kinda not?
Recently, there has been a hubbub about a corporate tax holiday for repatriating funds. There are many opinions pro and con, and I wish to officially sit on the fence like a mugwump.
Yes, I know: first I have to explain what ‘repatriation’ is. Let us say that you are Coca-Cola and have made $100 of profit in the EU, upon which you pay a 25% corporate income tax. Now, you wish to bring the remaining $75 home to the US. Problem: you must also, on top of the 25% you have already paid, pay another 35% in corporate US tax. So, you decide to leave that $75 in the EU to save money.
It is estimated that there is $1 trillion in corporate funds that US companies wish to bring home, save for the tax consequences.
Let us say, as suggested in a recent Fool article, that we allow a tax holiday and that all US corporations can repatriate any and all funds, and only pay 5%. This would be a cool, fast $50 billion in tax receipts that will go directly into Uncle Sam’s pocket.
Problem: last time this was tried, it failed. Well, not quite. Last time, it was sold as an employment increasing thingie-ma-bob. Nonsense: if we try it again, it will not increase jobs by one bit. However, it will do much to close the current budget gap.
Is this good? Yes, but no: US corporate tax policy is totally screwed up. The real solution is to rectify US policy. Perhaps: reduce US rates to ‘only’ 25%, and for repatriated profits, you will get a credit for taxes already paid for foreign corporate taxes?