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The Revenue Implications of Temporary Tax Relief For Repatriated Foreign Earnings: An Analysis of the Joint Tax Committee’s Revenue Estimates
By Dr. Robert J. Shapiro & Aparna Mathur
August 25, 2011
Full report available here.
This new study finds that the tax provisions of the Homeland Investment Act of 2004 should end up generating net revenue gains for the U.S. Treasury, and if enacted again later this year, would be likely to do so again. The study was conducted by Dr. Robert Shapiro, Chair of NDN's Globalization Initiative, and former Under Secretary of Commerce for Economic Affairs in the Clinton Administration, and Dr. Aparna Mathur, resident scholar at the American Enterprise Institute.
The study conducts an in-depth analysis of the Homeland Investment Act of 2004 (HIA) and current proposals to temporarily reinstate its provisions. By replicating the JCT estimating process to the extent possible and using recent IRS data in place of certain JCT assumptions, Dr. Shapiro and Dr. Mathur estimate that the 2004 HIA should produce revenue gains of $23.5 billion over 10 years, compared to the JCT's 2004 estimate of a $3.3 billion net revenue loss over 10 years. Applying this model to current conditions and proposals, Dr. Shapiro and Dr. Mathur estimate that rather than the $78.7 revenue loss projected by the JCT, enacting a "repatriation" provision similar to H.R 1834 this year would likely bring in a net $8.7 billion over 10 years to the U.S. Treasury.
According to Dr. Shapiro: "Enacting temporary tax relief for repatriated foreign earnings in 2004 brought back several hundred billion dollars for the U.S. economy, and will end up providing billions for the Treasury. Enacting repatriation again should have the same effects at a time when revenues are scarce. While it would be better for the American economy to put in place corporate tax reforms suited to the realities of our new global economy, taking the temporary step of another round of "repatriation relief" would be a fiscally sound option that policy makers should consider in the months ahead."
This study evaluates the Joint Tax Committee's (JCT) approach and results for estimating the revenue effects of the Homeland Investment Act (HIA) of 2004, which provided a temporary 85 percent deduction under the U.S. corporate tax for certain qualified earnings of foreign subsidiaries repatriated to their U.S. parent companies. We also evaluate the revenue effects of current proposals to provide another one-year tax preference for repatriated earnings, on the same general terms as the 2004 Act. We find that the JCT's approach has been flawed conceptually and its estimates of significant revenue losses are incorrect.
- In 2004, the JCT estimated that the HIA would cost U.S. taxpayers $3.3 billion over 10 years, relative to its baseline (current law without the provision). This year, the JCT similarly estimated that the same provision enacted in 2011 would cost U.S. taxpayers $78.7 billion over 10 years, compared to its current baseline.
- These projected revenue losses largely reflect two assumptions by JCT staff: First, the temporary tax preference would induce U.S. multinationals companies (MNCs) to shift the timing of their planned repatriations, so as to bring back funds in 2004-2005 or 2011-2012 which otherwise they would have brought back later at a higher tax. Therefore, the JCT assumes a sharp increase in repatriations during the periods of the tax preference, followed by sharp declines in later years relative to their earlier trend.
- New IRS data support the first assumption - repatriations did rise sharply in 2004-2005, sufficiently to produce revenues gains in those years, despite the lower tax rate. However, IRS data also show that repatriations in 2007 and 2008 did not fall below trend as the JCT predicted, but actually accelerated relative to their previous trend. Therefore, the predicted revenue losses in later years have not occurred.
- Second, the revenue losses predicted by the JCT assume that the prospect of tax relief for repatriated earnings in the future would induce MNCs to alter their corporate behavior and organization so that more of their earnings would come from foreign markets.
- JCT has offered no evidence for this assumption, nor have independent analyses found that the expectation of this tax preference altered corporate behavior and structure in this way. High levels of foreign direct investments by U.S. MNCs began at least 15 years before the 2004 Act, in order to build global production networks that could serve global markets. There is no evidence that this process accelerated after the 2004 passage of HIA.
- Based on current data and knowledge, including actual repatriations under the 2004 Act, repatriations in the early out-years of the JCT's 10-year revenue estimate, and the actual trend growth rate of repatriations, we can generate new revenue estimates.
- By replicating the JCT estimating process to the extent possible and using the new data in place of the flawed JCT assumptions, we estimate that the HIA will produce revenue gains of $23.5 billion over 10 years, compared to the JCT's estimate of a $3.3 billion revenue cost over 10 years.
- Similarly, we estimate that a reprise of the HIA enacted in 2011 would produce an $8.7 billion revenue gain over 10 years, compared to the recent JCT estimate of a 10-year billion revenue cost of $78.7 billion.