On Monday, October 28th, The Daily Commercial ran a story from the Associated Press (AP) entitled, “Both sides agree: No major budget deal on the horizon.” [sic.] This short piece reported that both Paul Ryan (R-Wis), chairman of the House Budget Committee, and Senate Majority Leader Harry Reid (D-Nev) do not expect their budget negotiations to yield anything more than an agreement to take the sharpest edges off the sequestration cuts that, for various reasons, everyone claims to hate. The state of play was described as a standoff:
Most Republicans say they simply won’t agree to any further taxes atop the 10-year, $600 billion-plus tax increase on upper-income earners that President Barack Obama and Democrats muscled through Congress in January. Without higher taxes, Democrats say they won’t yield to cuts in benefit programs like Medicare.
However, tucked away on an inner page, the article teased the attentive reader with an alternative outcome, proposed by another Republican involved in the negotiations, Rep. Tom Cole (R-Okla):
“Both sides would like to deal with the sequester. And we’re willing to put more revenue on the table to do that, and we would like to do it with entitlement savings.”
Cole was not talking about raising tax rates; one option he mentioned would be to give corporations incentive to repatriate untaxed overseas profits. [Emphasis added.]
It is worth noting, since this short AP article does not spell it out, that Tom Cole is, by contemporary Republican standards, not completely insane. In the 2012 episode of Washington’s fiscal-chicken soap opera, Cole took the somewhat heretical position within his caucus of arguing in favor of accepting the president’s proposal to maintain the Bush tax cuts for only the bottom 98% of Americans in order to avoid the fiscal cliff. He still opposed raising taxes on the wealthy, but preferred to fight that battle separately – a strategic choice that would have spared his party much embarrassment. In other words, Cole is (again, relatively speaking) an adult and might be worth listening to – even if he is terribly wrong.
We’ve been waiting for the idea of a corporate tax holiday to come back into play. It hasn’t been receiving much attention since the CEO of Apple whined before Congress in the spring that corporate tax rates are too “burdensome.” But now, in the words of the one-hit wonder group, Tag Team, Whoomp! There it is. Before we look at how bad this idea is as a matter of tax policy, let us take a few moments to appreciate the staggering plutocratic hubris on display here.
The Profits Are Coming! The Profits Are Coming!
When Tom Cole talks about giving corporations an “incentive” to repatriate foreign profits, he means letting them pay a few pennies on the dollar instead of the statutory rates that would otherwise apply. In the supposedly “one-time” corporate tax holiday of 2004, corporations enjoyed an effective tax rate on their foreign profits, after various deductions and credits, of only 3.7%. To accept a recrudescence of such a conspicuously corrupt arrangement as a form of “revenue” that may be traded for desired changes in spending is to grant nothing less than full-spectrum dominance of fiscal policy to the corporate oligarchy. It is to present the American people with a deal in which the corporations get something they want very much – a massive tax break, the likes of which no ordinary American taxpayer could ever expect – in exchange for getting other things that they want, like lucrative defense contracts potentially jeopardized by sequestration, and long-term commitments to scale back the social programs they are afraid they will have to pay for.
The presentation of a corporate tax holiday as a concession by the ruling class of corporate titans is a not just a slap in the face but a dagger through the heart of the American people, inexcusably rewarding the very actors who gutted the middle class and permanently enervated the U.S. economy by offshoring production, employment, and the ability to consume that flows therefrom. Does Tom Cole believe that we should be grateful to our masters for allowing us to claw back a few cents on the trillions of dollars they have deliberately taken away from the United States? Perhaps he tells himself that we didn’t build those profits and we should not punish virtuous, hard-working capitalists for being successful. Should we, in fact, apologize to them for making their lives so unbearable that they felt it necessary to transact business thousands of miles away? Should we feel guilty for making unreasonable demands for decent wages, working conditions, and pensions when these far-sighted leaders understood that higher economic principles (like Ricardo’s theory of comparative advantage) would make us all better off in the long run, as Wal-Mart’s cheap Chinese baubles conclusively prove? Should we wave little American flags when these brave dollars triumphantly return – like sea turtles hauling up on Florida’s beaches after a death-defying odyssey – to the domestic bank accounts of General Electric and Apple?
We live in a strange world indeed when a win-win for corporate America can be discussed in a putative democracy as a potential bargain. But in a polity that has grown accustomed to the most outrageous hostage taking, such a proposal can actually appear rather sane – which makes Tom Cole the perfect man to inflate the trial balloon. And we should not be surprised to find that balloon being embraced at the other end of Pennsylvania Avenue, for while the right’s lunatic fringe portrays the president as a Muslim socialist, the few remaining adults in the room understand that Obama’s real signature achievement has been the interstellar trajectory of corporate profits, and his relationship with the owners of America is far closer than anyone wants to admit. For a man who has mastered the art of illusion, characterizing a corporate tax holiday as a good thing for the American people should be child’s play.
Pitching Perverse Incentives
For Tom Cole’s proposal, the numbers are no better than the symbolism. As the Center on Budget and Policy Priorities (CBPP) recently noted, a corporate tax holiday is not going to pay for ending sequestration or anything else, because the amount of money brought in is dwarfed by the revenue losses that follow in the longer term. When profit repatriation was mooted in 2011, Congress’ Joint Committee on Taxation (JCT) found that the immediate revenues would be greatly outweighed, even in the first decade, by $79 billion of losses. The reason is simple: a corporate tax holiday encourages corporations to shift even more activity offshore in the (now reasonable) expectation of additional tax holidays.
In a thorough analysis of the proposals in 2011, Chuck Marr and Brian Highsmith of the CBPP debunked the corporations’ claims that repatriation would stimulate investment and employment. In the 2004 holiday, most of the repatriated profits were used by corporations not to invest in the United States or to create new jobs here; instead, the money was used to buy back company stock (concentrating ownership) and distribute dividends to stockholders (a windfall for the investor class). As noted above, there is no rational incentive to invest in the United States when executives can expect to pay such low rates of tax on the profits from foreign investment. This perversity is best illustrated by the technology and pharmaceutical sectors, which theoretically offer the best prospects of highly skilled, remunerative employment. Since their activity involves intellectual property that is relatively easy to offshore (such as by registering patents in foreign tax havens), these businesses have a particularly strong incentive to make money abroad. In 2004, half the repatriated profits were in these sectors; further holidays would reward and cement deliberate tax avoidance and disinvestment. The perversity of the incentive is compounded even further by the corporations’ ability to expense foreign operating expenses while deferring the payment of tax on foreign earnings, sometimes resulting in negative tax rates. We aren’t just encouraging them to take our economy away; we’re paying them to.
Although Congress attempted to prohibit corporations from using the repatriated profits in non-productive ways, the language of the law was easily evaded. (The fungibility of cash allows companies to claim that those dollars paid for certain expenses that had already been budgeted for, while liberating other dollars to have more fun.) Hewlett-Packard repatriated $14.5 billion, bought back $4 billion of stock, and then laid off 14,500 workers. Pfizer brought in the biggest haul – $37 billion – and promptly laid off 10,000 workers and closed American plants. Merck repatriated $15.9 billion and laid off 7,000 workers. And Honeywell repatriated $2.7 billion and laid off 2,000 workers. Critically, these layoffs occurred in 2005-06, a period of strong economic activity in which employment was otherwise expanding. If repatriation didn’t create jobs then, why on earth would we expect it to do so now, in a much weaker environment?
But as far as the corporations are concerned, the die has already been cast, and it is simply a question of when, not if, there will be another holiday. Citing a study by Professor Thomas Brennan of Northwestern University, the CBPP reported that American multinationals have responded to the 2004 tax holiday by reinvesting profits overseas – the exact opposite of what they were supposed to do.
This is precisely the kind of behavior that led the JCT to predict that a second tax holiday in 2011 would cost 24 times more than the holiday of 2004 (which cost an estimated $3.3 billion over ten years). A sizable chunk of the American tax base is effectively emigrating.
The argument that corporations aren’t investing in the U.S. because they can’t access the earnings that are “stranded” overseas – apart from being exceptionally cynical, given the deliberate choices that placed the money overseas in the first place – deserves short shrift. The kinds of companies that will benefit the most from another tax holiday have plenty of cash on hand, as evidenced by recent dividend payments and stock buy-backs. As Marr and Highsmith observe, corporations are not investing their domestic cash hoards right now because of weak demand and uncertainty, conditions which will still obtain if foreign profits come home. There is no reason to believe that repatriated cash will be allocated any differently.
A Defining Moment
Interestingly, the Bush Administration – generally and correctly perceived not merely as pro-corporate but as the manifestation of a corporate coup d’etat – actually opposed the corporate tax holiday of 2004, after a Council of Economic Advisers report concluded that the plan was unfair to businesses which did not operate overseas, and would not produce the results that were being touted. If the Obama Administration – generally but incorrectly perceived as anti-business – and the current Congress now agree to a second corporate tax holiday, we will have a throbbing confirmation of the extent to which the United States has drifted even further to the right and become a pure plutocracy.
Naturally, the president will have to find some way to package the deal. Most likely, it will be a regrettable price to be paid in the name of bipartisan compromise. He had no choice: House Republicans were going to blow up the world, blah, blah, blah. Perhaps Congress will attempt to require corporations to purchase special types of public infrastructure bonds, though that sounds too socialistic to be entertained by the House of Corporate Representatives. Most likely, the pitch would focus on the argument – ignored by the CBPP analysts and a blatant attempt to recast their findings – that a trillion dollars in the hands of stockholders, now flush with dividends, would be a great stimulus for the economy. In the case made by Forbes Magazine, this prospect translates into a delicious combination of consumer spending or investment. The fact that this booty flows overwhelmingly to the small minority of Americans who own the large majority of the shares will not just sit well with readers of Forbes; it is entirely consistent with the grotesque trickle-down experiment that Barack Obama’s economy has become. With millions of Americans standing on the verge of losing their Food Stamps, a 10% uptick in luxury-car sales will surely make all the difference.
As Paul Craig Roberts, an architect of Reaganomics and consistent critic of offshoring points out, American wages have been converted into corporate profits, and the “spending power of American consumers is now the paper wealth of the mega-rich.” A top-heavy economy without a broad base of consumer power is doomed to decline. And perhaps, for the corporate class, that is perfectly fine. For when the U.S. loses its preeminence, their move to balmier climes will be relatively painless: the groundwork has already been laid, with foreign facilities and foreign markets already in place. And for us, the remaining inhabitants of a hollowed-out nation, well, at least we get to keep the flag.