Ignorance & Prejudice Drive Ruinous Economic Policy

Double taxation of profits is not a jobs plan.

This article was published on June 22 and revised on June 23 in response to questions, objections and advice received via email and Twitter.

It’s human nature to seek one or two silver bullet reforms that would miraculously ignite prosperity.  Thus the appeal of the Obama “stimulus” that was enacted two years ago on the promise that it would in the President’s own words, “immediately jump start job creation and long term growth.”

But America’s economic decline has been “death by a thousand cuts,” the predictable, cumulative effect of layers of anti-liberty, anti-business taxes and regulations, enacted over several decades and accelerated during the Obama Administration.   If we are to restore our economy we must do the tedious work of identifying for Congressional action each of government’s tax and regulatory barriers to prosperity, one at a time.  This article is about one such barrier.

Last month the Republicans published their plan to create jobs, a document with several sound policy proposals whose effect would be to lower government imposed barriers to capital formation, business expansion and job creation.  To understand one of those proposals consider two car companies:

The German company Diamler manufactures Mercedes Benz cars at a plant in Alabama and sells them in the US.  Diamler pays corporate income tax to the US Government on profits generated here from making and selling cars.

General Motors manufactures and sells it’s Opel brand of cars in Germany.  GM pays corporate income tax to the German government on profits generated there.

So far both companies are treated the same way, and each government has a source of tax revenue.  But the equal treatment ends when profits are brought home.

Germany, and virtually every other first world nation, recognizes that profits generated in a foreign country have already been taxed and welcomes those profits back, to be invested at home without additional tax burden.  But the American corporate tax code requires GM and other corporations that operate internationally, such as Apple, Microsoft and Google, to pay US corporate income tax on profits that are brought home or “repatriated,” even though those profits were already taxed by a foreign government.

This stupid tax policy is yet another example of the political establishment’s ignorance of economic incentives and disincentives and the progressive movement’s irrational prejudice against all corporations.

The result is profits that could be brought home and invested in America instead pile up in foreign jurisdictions waiting for foreign investment opportunities.

The Republican proposal would permit:

…companies to bring back their overseas profits without being subject to double taxation so they can invest in our economy.

Critics of the Republican proposal cite the “repatriation holiday” enacted by Congress in 2005.  Companies were allowed to bring home overseas profits and pay a reduced tax rate of 5.25%.  More than $300 billion dollars were repatriated to the US.

But a couple of studies concluded that most of this money was allocated in ways other than direct, immediately observable, job creation by those companies.  Instead some of it was distributed as dividends to shareholders and some used to financially strengthen the companies by buying back stock to reduce the number of shares outstanding.

But not tracking the ultimate destination of dividend or share buyback cash, ignores one of the positive results of liberty and free markets, that profits investors earn from older, established companies becomes the capital that funds newer business opportunities.

The repatriation holiday was a 12 month period during 2005 and 2006.  It turns out that the year ending March, 2006 was the best 12 months of job growth of the entire decade, with 2.7 million new private sector jobs created, dropping the unemployment rate to 4.7%.  Compare that record with the most recent twelve months when 1.7 million private sector jobs were created.  The current unemployment rate is 9.1%.

While this employment growth was probably not all a direct result of repatriation the statistics do offset data offered by others to conclude that it was “bad” or “wrong” to allow companies to bring their profits home at less than full double taxation.

Some in Congress are calling for another “holiday” period when profits can be repatriated at a reduced tax rate.  However this strategy is a perverse incentive for companies to continuously accumulate profits abroad and wait for the next holiday.  The Republican proposal is to provide an incentive to invest in America by permanently changing the tax code to permit repatriation at any time with no tax punishment at all.  Business decision makers are long term thinkers and respond more favorably to long term policy than temporary gimmicks.

Democrats argue that this GOP proposal is “bad” because it won’t help small businesses who have no foreign profits.  But as we said at the top of this article, the proposal to remove double taxation of foreign profits is not offered as a cure-all for every business.  It’s one of many legislative actions that are necessary to restore prosperity, full employment and traditional American optimism.

Indeed there are plenty of actions that must also be taken specifically to lift the governmental burden on small business. But so far the President and Congress refuse to consider them.

By some estimates there are more than a Trillion dollars of corporate profits in foreign jurisdictions that could come back to America.  Even if those dollars come home free of corporate income tax they will still generate tax revenue when they are reinvested or distributed to share holders.

The question is should companies be allowed to repatriate foreign profits without double taxation.  If the goal is to help create jobs and prosperity the obvious answer is yes.  Even if the only goal is to maximize tax revenue the answer is still yes, since the status quo generates zero revenue.

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