Donald Trump wants to lower the corporate tax rate on foreign profits from 35% to 10%.
Would another tax holiday create jobs?
The New York Times says “Not Necessarily”
President-elect Donald J. Trump has said he would like to create a “tax holiday” so that American companies can bring back profit that was generated overseas at a lower rate. In his view, this influx of cash will create jobs.
But corporate boards and executives may have different ideas.
They are likely to use much of the estimated $2 trillion held overseas to acquire businesses in the United States, to buy back their own stock or to pay down debt, say advisers of America’s top corporate executives.
Historical Guide
For clues as to whether another tax holiday would create jobs, all one needs to do is investigate Corporate Tax Holiday History.
In 2004, the United States Congress enacted such a tax holiday for U.S. multinational companies, allowing them to repatriate foreign profits to the United States at a 5.25% tax rate.
Under this law, corporations brought $362 billion into the American economy, primarily for the purposes of paying dividends to investors, repurchasing shares, and purchasing other corporations.
In 2011, Senate Democrats, arguing against another repatriation tax holiday, issued a report asserting that the previous effort had actually cost the United States Treasury $3.3 billion, and that companies receiving the tax breaks had thereafter cut over 20,000 jobs. A second repatriation tax holiday was defeated in the United States Senate in 2009.
Address the Real Problem
It’s highly likely corporations would act exactly the same as they did last time.
The problem is not tax repatriation. The problem is US corporate tax law is fatally flawed. Allowing foreign profits to accumulate overseas at low rates while charging 35% in the US is ludicrous.
It’s easy enough (in theory) to fix that problem. All one needs to do is lower corporate taxes in the US to zero, which is where they should be.
That may not or may not spur job creation by US corporations, but it would stop all these ridiculous tax games corporations play.
Curiously, such a move would create jobs, not from US corporations, but by foreign companies moving offices to the US to escape their higher tax rates.
Mike “Mish” Shedlock
“…foreign companies moving offices to the US to escape their higher tax rates.”
Bingo.
And if we could reverse/eliminate payroll-related taxes (massive disincentive that stunts hiring/growth), we would ABSOLUTELY create hundreds of thousands of jobs here.
Agreed. These continual stimulant/punishment tax manipulations create one large disincentive to hire….Chaos. hiring people is NOT a short term reaction to anything beyond seasonal considerations. What employers seek is consistent and rational laws that allow them to anticipate. We cannot hire and train people and then simply turn them out the next day on short term financial considerations. I have kept people on for years waiting for the economy to rebound and postponed hiring for the same reasons.
The cost of employment is too damned high. Employers need more (or at least the illusion of) certainty and these “one time” actions are not what is needed.
We should eliminate ALL income taxes, individual AND business. Taxes should be consumption based, preferably a sales tax at point of final purchase. This would put American produced goods in a much more equal footing with imports PLUS stop penalizing PRODUCTION. If America did this one simple thing I believe we would see a massive resurgence in production….Not to.mention reliving a massive BURDEN not just of money, but THREAT from the IRS. The IRS is FEARED and in respect to AMERICAN citizens, should be eliminated. We should not fear our government over something so obtuse an ill-defined as the tax code.
For years I have advocated a 25% (nominal) Goods and Service Tax on all final purchasers, i.e. output less input from manufacture to use, with no exceptions or deductions for anybody for whatever use they put the good to. For example, Greg Norman buys a $200 million yacht, $50,000 is payable as GST even if it is used as a business item. There are, of course, social checks and balances to be taken into account where basic living items are subsidized on a sliding scale for the less well off, cutting off when they reach a good wage.
All other taxes, property, inheritance, sales, income etc should be eliminated and effective penalties put in place to discourage cheats.
Maybe 1% of the amount collected could be retained by the collector to offset the inconvenience of being the Govt. Tax Collector.
The 25% or whatever the final rate is determined to be should be set in stone to stop future governments tinkering with it. they should then learn to live within their income.
It is then only a matter of distributing the collected money wisely which is probably beyond government.
How is 25% of $200 million $50,000?
you jump on a simple typo… wow, are you a total douchebag!
sorry, even Greg Norman wouldn’t spend 200 mill on a boat. It should read 2 mill
even then it was wrong
Bingo! The Fair Tax would do that and much more. Look it up: http://www.fairtax.org. Read the white papers.
I would tax consumption but exclude food, medicine, clothes up to a certain dollar amount.
Combine that with a truly flat income tax with absolutely no deductions for anything.
Far more fair than fairtax.org
I need help understanding how you could structure an income tax with NO deductions. Many small businesses file in their own name. They must be able to deduct their business related expenses from their gross income. Many actually earn a very small percentage of their gross income. This is where I have departed from a simple tax as it does not differentiate real income from gross income, if we are to allow NO deductions….and it is business tax deductions where most of the nefarious deeds are done. This is not about taxes. This is about eliminating fraud and deliberate government manipulation of markets. Eliminating ALL business taxes (which after all are ALWAYS funded by their customers (US)) also eliminates a massive intervention of government in business. Our system is dangerously close to implosion BECAUSE of the corruption offered by massive unaccountable government intervention. THERE ARE NO MARKETS and every politician is funded by business interests that have EVERYTHING to do with the legislation they pass which is tied to taxes, regulation and preferred treatment.
And again, what a blessing it would be for Americans to never have to look over their shoulder again, worrying about an IRS witch hunt landing on their back at any moment.
Further, if we are going to have any confidence in our taxing system, it must have the appearance of fairness and transparency and there is nothing more transparent that your line item tax amount with each purchase. Income taxes were designed to be anything but transparent. At first they would only tax the rich (like the rich couldn’t pass those cost on to their customers given most “rich” were business owners). When that didn’t pay out enough they went after lower income brackets but found those very difficult to collect from, so they imposed payroll tax deduction “responsibilities” on employers. So now the taxes come out before you ever have a chance to touch them, and you don’t even have to send them in as your benevolent employers does that for you. Every aspect of our taxing system is constructed upon deceit and lies. Support higher taxes because they will be borne by everyone but YOU. BY your employer, by your grocer, by your home builder.
Lets just end it with a sales tax that can be made progressive to protect the poor while offering everyone the exact same treatment. I know, what an abhorrent idea…treating everyone equally. In Texas NO ONE pays sales tax on unprepared food, rich nor poor.
It’s a similar problem with food. A piece of bread nicely packaged inside a Rolls Royce, is still a piece of bread in nice packaging. Unless the spy, report and rat out your neighbor police gets very intrusive.
And a much, much worse loophole, is defining what is “consumption” and what is not. I can guarantee you whatever your neighbor busts his ass to put together will be taxed. Whatever Goldman Sachs sells, will not.
Just tax land and be done with it. Kind of hard to cheat on that one, while still expecting help from the State to evacuate those you deem “squatters…..” No spying on activity required. Nor any form of definition-of-what-is-what jockeying for the politicians and their lobbyist friends to have their way with.
taxing property alone (to the exclusion of other tax sources) is wildly inequitable… a tiny minority shoulders the tax burden for a majority that has ZERO skin in the game… a recipe for revolution, imo.
The tax on property will flow through the economy on the back of the activity that enables claiming exclusive use of a piece of land. A more generalized “contract insurance, ” perhaps the greatest of all Libertarian pipe dreams, is perhaps better, if one disregards enforcement cost and friction. But the friction costs are enormous, and trying to get around that inevitably ends up in arbitrariness hell.
So a straight up land tax, combined with an import tariff (again, no additional government spying, beyond what is required to maintain some semblance of control over what flows across the border, is required) is likely as good as it gets. It has tonloads of salient properties, and virtually no contraindications, neither economically nor morally.
As for revolutions, one of the slamdunk properties of a land tax, is that you don’t even need enforcement. If you don’t feel its worth it, just don’t pay. And have a go at protecting your own chunk of land. Literally no room for slimy political hacks to try to set people up against one another by claiming “those guys don’t pay their fair share. Stomp your boots for me and I’ll rob him and throw you a few crumbs from the loot gathered…..”
If US would have 10% corporate tax it would attract lots of companies currently paying 20%-30% in europe.
The current US corporate tax of 35% is among the highest in the world.
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If I could plan US corporate tax law it would be 10% tax for corporations but if the money would be used for stock buybacks and executive bonuses there would be a further tax of 10% on it for a total of 20%.
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Stock buybacks are mostly wasted money and executive bonuses have got out of hand completely so this further 10% tax on them would encourage using the money to grow the business and try different lines of businesses with the profits that would employ more people instead of doing stock buybacks and massive executive bonuses.
Money kept out of US by US companies should also be taxed at 10% by US to stop all tax games because for example to Apple even 10% is lots of money because currently their tax avoidance is so advanced with the irish-dutch sandwich that Apple pays under 1% in taxes on their profits outside USA.
Even a small business income tax provides incentives for government interference and corruption . Eliminate these taxes and see a major draining if the lobbyists swamp.
What amazes me is when someone tells someone, emphatically, that they do not understand what they are saying, furthered by someone else agreeing emphatically with the comment that informed said someone that they do not know what they are saying, furthered by the person who does not know what they are saying, instead of requesting that person inform them as to what they do not know what they are saying, continues to repeat what they are saying…. Whew… long sentence.
Mike. What do you make of the proposed border-adjusted tax? The deal, i gather, includes the border adjusted tax, and the corporate tax you write about. But the border adjusted tax is what concerns me the most, seeing that we could be in for some volatility (and that is understating it ) in forex and commodities if it is passed. With the exception of Goldman Sachs everybody else seem to think that the USD will be revalued on the upside by some 15-20% if it is passed, while everything else devalued by an equal amount so the balance of trade is not affected according to online references. Apparently the only thing standing in the way of this, is WTO rules.
Tax holidays are like Amnesties, they do NOT solve the problem.
The problem regarding corporations is too high corporate tax at 35%.
The problem regarding illegal immigrants is too many illegal immigrants.
With tax holidays corporations will just wait for the next one.
With amnesties illegal immigrants will just wait for the next one.
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The republican cheering of Reagan is dumb and baseless when it comes to immigration policy.
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Reagan was the original Amnesty guy and the 1986 Reagan amnesty that legalized millions made future illegal immigrants sure that another amnesty would come sooner or later.
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Reagans 1986 amnesty has attracted millions of extra illegals to USA that would have stayed home if there NEVER would have been an amnesty in USA.
AS you imply, even if not understanding why, corporate taxes could be cut to zero. There WOULD BE NO REPERCUSSIONS ON THE GOVERNMENT’S ABILITY TO SPEND.
Federal spending does not depend on taxation, not even for 1 cent. Taxes are not levied to raise funds for a federal government’s spending. It has other uses, but not that one.
So, promote away!
Normally I’m pretty open about different ideas, but what you just wrote is really stupid.
Governments must raise cash to spend. They print, borrow, or tax or any combination of the above. Governments aren’t entitled to free stuff nor do expenditures magically pay for themselves without cash to the seller.
Some are flirting with negative rates as a sneaky means to ensure that public debt gets converted to revenue under ideal circumstances (negative rates => govt pays back less than borrowed. Actual inflation over a long enough time period debases the NPV of actual payment to potentially a profit from borrowing. Then it’s refinanced.)
Short of that scam starting in the USA (thanks to Trump winning, it won’t. If Hillary or a ‘stock’ Republican won we would see capital destruction in this form just so the beast could feed itself.) Govt must borrow indefinitely, cut spending, or raise taxes. Or task the Krugmans and Bernankes of the world to spin a new free lunch theory and use the upper 1% as a handy scapegoat.
Government must only tax enough to create the illusion of financial soundness. Even though the debt grows continuously and is never paid off,only rolled over, their debt would be apparent to all in its fraudulence if they stopped pretending. Taxation is more about control and manipulation than actual revenue. This is not a system of GAAP accounting, it is a confidence game that only requires we BELIEVE it is solvent and legitimate. WE have now approached that tipping point where few actually believe it is solvent or even sustainable, but continue the pretense as their only hope. It is a documented Ponzi scheme and all that is at play now is strategic timing, those knowing the ship is going down and only trying to determine their optimal timing to jump. Most already understand that all of the “viable” life boats are already taken, and all that are left are leaky rafts only offering enough hope to keep order and prevent a chaotic run for the exits.
Financial soundness ONLY comes from the “full faith and credit” of the federal government. The fed has debts [ i,e. Government debt] which are misnamed and should be properly called deposits. It doesn’t actually have any real debt [beyond transitory accounting processes].
It has no debt because it can and does create payments ad hoc at any and every opportunity.
A creditor will see Treasury instruct the Fed to mark up the numbers in the reserve account at the Fed of the creditor’s bank. It then becomes money when the bank transfers the numbers over to the creditor’s own account. By this means is money injected into the economy. If that didn’t happen the economy would not grow.
The ponzi schemes are all private, commercial bank shenanigans. As in 2008 the Fed can bail them out with its “free money” capacity. I’m sure it will happen again, but vastly bigger in scope next time.
Obviously you are not open to different ideas. You are stuck in the mainstream mindset like most of us. First you confuse Federal and State governments.
Governments that are not monetary sovereign do have to raise money through taxes etc,. They are like households in that regard, Greece or Kansas for example.
The Federal Government however spends first and taxes later. [it should be obvious, it has to create the money we need to pay the tax] Like corporations they get money by doing work, but the government pays from thin air into reserve accounts at the Fed. Corporations may have to borrow which means they have to pay it back. The Fed has no such problem. It net credits money into the economy. In that sense it is free.
The rest of your reply is not worth responding to.
Work down to ZERO tax for any company that does 100% of it’s product creation and production in the US with an increasing scale to current tax rates for lower percentages. ZERO tax on foreign sales.
How about we tax everyone EQUALLY. Is this not what we claim we want? Free trade?
As is we tax our domestic businesses and LABOR while taxing none of it coming from foreign nations. That would seem like ANYTHING BUT free trade….more like stupidity or deliberate self destruction.
Will cash repatriation create jobs ….
If the cash is used for dividends: Yes because it will be spent and the spending will represent demand which will show up as increased production which will show up as jobs. (rising interest rates have the same effect.)
If the cash is used for physical investment in the company: yes, absolutely
If the cash is used for stock buybacks: No, that’s just a scam.
I would only do the cash repatriation in combination with the tariffs. Otherwise, the repatriated cash will just flow out via trade deficit.
A corporate repatriation tax holiday would strengthen the US dollar. US Consumers would then buy more foreign products, sending the money right back to other countries.
“Curiously, such a move would create jobs, not from US corporations, but by foreign companies moving offices to the US to escape their higher tax rates.”
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Possibly. But as long as $US is (very) strong I wouldn’t expect to see much onshoring just due to favorable tax rate. Why not relocate to another tax haven country … with weak currency?
“The problem is US corporate tax law is fatally flawed. Allowing foreign profits to accumulate overseas at low rates while charging 35% in the US is ludicrous.”
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Yeah, well … who actually pays full retail?
The last time Congress murmured about changing the corporate tax rate (2012?) The Hill ran a story on how large US corporations – surprise surprise – did NOT want a lowering of tax rate … that did away with all the loopholes. Corporations have spent years creating loopholes (lobbyists writing parts of legislation) that favor (certain) corporations … resulting in them paying a much lower effective tax rate.
The accounting profession one of the strongest lobbying group. You think they’ll stand around while Congress votes to move tax rate to 0% …. essentially putting a million (well paid) US accountants out of work?
Dream On
And THAT is our greatest obstacle. Tax lawyers, accountants, investment advisers and probably many more professions would fight this to the death. It has also been proposed as a gradual changeover but those of us cynics see this as only an opportunity to have both….income and federal sales taxes. Change would need to come about from a carefully worded constitutional amendment…which is where ALL taxes should be legislated.
One word: Trump.
the NY Times despises Trump and has an ulterior motive
You’d have to structure it properly.
1. Lower corporate rates to at least 15%. 10% is better and 0% is the best.
2. Have the tax holiday with a 5% rate, or some low number.
3. In order to qualify, the money has to go to dividends or capital investment.
4. Dividends would be a big boon to failing pension plans. That would count for a lot.
5. No increase in stock buy backs or bonuses.
I agree that the key problem is the 35% rate, but bringing back the overseas money can have benefit if structured properly. I agree that using the money for stock buy backs only benefits executives who have stock options and bankers who collect their fees.
Put it this way. The cash comes back. Execs execute their options (coupled with buy backs) and the cash ends up in the executives bank account and as banker fees. The suckers end up with highly priced pieces of paper (stock) that is backed by the same productive capacity they could have bought at half price.
The simplest solution (K.I.S.S.) is to pay it out as dividends. This puts the bulk of the cash into pensions and life insurance companies, which hold the bulk of stocks.
Who pays 35% corporate tax?
Nobody of the SP500 as far as I know. A lot of them paying nilch, zero, nuttin’. And now you want to give them another free ride – wow that’s free market thinking.
If you want to sell your product here in the US pay full taxes and produce here. If you go for cheapest labor your tax rate goes to 50% on world profits or just sell it to the Chinese.