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U.S. corporations have an estimated $2.6 trillion in profits sitting overseas and out of reach of American tax collectors. There are rumblings from both political parties about a possible tax holiday, which would encourage companies to bring some of that money back to America, by offering them a super-low tax rate.
The argument is that this could provide money for a big infrastructure investment and stoke job creation, though many economists are skeptical. Congress opened the gates to a tax holiday in 2004. If a new proposal is anything like the 2004 measure, companies could have a window to bring profits home at a 5.25 percent tax rate, instead of 35 percent. Business leaders and their political allies argued then that the tax holiday would lead to job-creating investments when the overseas profits came to America. Research into what actually happened shows otherwise.
“What we found was that the funds seemed to be used primarily for shareholder payout, that is, a combination of dividends and share buybacks,” said Dhammika Dharmapala, economist at University of Chicago Law School, who examined the impact of the 2004 policy in a paper with two colleagues.
Even though plenty of money did come back from abroad, companies appeared to hand most of it out to their shareholders, rather than making investments that may have created new jobs.
Politicians and business leaders complain about America’s corporate tax code, and there is indeed plenty that can be fixed there. But if you hear them making big claims about how a one-time tax holiday is the answer, just remember that it doesn’t seem to have worked out quite the way they said it would last time.