Ever hear of a Double Irish? How about a Dutch sandwich? These aren’t cocktails or bar snacks but rather complex financial strategies used by many American companies to dodge taxes on overseas earnings. There has been little debate about corporate taxes during all the fiscal cliff hoopla, but I expect this issue to go on the front burner this year, as businesses lobby for lower rates on earnings made abroad. There’s a lot at stake here – by some estimates, companies are holding $1.7 trillion in profits outside the U.S.
There are two proposals being discussed in Washington – one, a temporary tax holiday for American businesses, which would allow them to bring back overseas profits at a low tax rate of around 5% percent, versus the 35% they pay now. Companies say they’d put that money to good use investing at home and creating jobs in the U.S. Longer term, they’d like to see the U.S. move to a territorial system, which would mean that foreign earnings would be tax-free.
But while this plan might well goose the stock market, it won’t create more jobs at home – in fact, it might even do the opposite. We know this because we tried it back in 2004, when Congress enacted a temporary tax holiday on foreign earnings at the rate of 5.25%. Firms brought money back – some $362 billion—but most of it went not to capital investments or new business development but dividend payments and stock buybacks. JP Morgan estimates that the same thing would happen this time around, and that the resulting stock boost would be similar to another round of Fed quantitativeeasing. No wonder everyone is so excited.
There are things we could do to improve the corporate tax code – but allowing foreign earnings back into the U.S. at low rates or with no tax isn’t one of them. To read more about the issue, and how we should solve it, check out my latest Curious Capitalist column in this week’s Time Magazine.