WASHINGTON — As senators debate the details of massive corporate tax cuts before a final vote, the foundational logic of a key component of the Republican legislation remains in question: that encouraging corporations to bring home trillions in cash stockpiled overseas will create jobs.
Republicans have an inconvenient history to reckon with.
Both the House and Senate bills currently include a corporate tax cut to 20 percent from 35 percent, as well as a steeply discounted tax rate for any profits brought back to the country from abroad — a sum estimated at more than $2.6 trillion. In 2004, Congress made a similar attempt to persuade companies to shift their cash back to the United States in order to grow the economy, but research later found that the result was not the windfall Republicans promised.
When President George W. Bush signed into law a so-called tax “holiday,” allowing billions in offshore profits to be taxed at just over 5 percent, Republicans said it would be a boon for job growth and domestic investment. According to a 2010 study analyzing the impact, however, corporations instead spent the vast majority of the cash on shareholder payouts.
“The Republicans have been saying the same thing over and over again, and they keep getting disproved,” said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center. “That does not stop them from continuing to repeat the same message, even though 2004 demonstrated that’s silly of them.”
The Senate bill, which is on track for a final vote at the end of this week, attempts to lure that money back by taxing cash earnings returned to the United States at 10 percent, while reinvested earnings would be taxed at 5 percent.
President Trump has been selling the corporate tax breaks to voters with the same Republican rhetoric that was used in 2004.
“It is great for companies, because companies are going to bring back jobs,” Trump said at a rally in Missouri on Wednesday.
Even Republican Senator Bob Corker, who has expressed reservations about the impact of the $1.5 trillion tax bill on the deficit, said he remains confident that these corporate tax breaks would have an unquestionably positive impact.
“The corporate changes I do think are going to drive investment, I really do,” the Tennessee senator said on Wednesday at the Capitol. “I was a business guy most of my life and know those things affect behavior.”
But corporate executives have given reason to believe they’ll replicate the same behavior as in 2004.
Bank of America Merrill Lynch surveyed more than 300 US corporate executives over the summer and asked what they would do with the money if tax legislation allowed foreign earnings back into the country at a low rate. The top three answers were paying down debt, repurchasing stocks, and mergers.
And at an event for CEOs this month, a crowd of executives was asked whether they would boost domestic investment if the corporate tax rate was cut. Only a handful of executives raised their hands, prompting Trump’s top economic adviser, Gary Cohn, to ask, with a tinge of exasperation, “Why aren’t the other hands up?”
Earlier this month, AT&T’s chief executive, Randall Stephenson, gained Republican praise by pledging to invest an additional $1 billion domestically if the tax bill is implemented.
Kristin Forbes, a Massachusetts Institute of Technology economics professor who co-authored the 2010 study, was a member of President Bush’s Council of Economic Advisers when the tax holiday provision reached his desk.
Once she left the White House, her research showed that the tax holiday encouraged corporations to bring roughly $300 billion in offshore earnings back into the country, but about 92 percent of it went to shareholders in the form of dividend payouts and share repurchases — despite the legislation’s restriction on using the funds for those purposes.
“Even though many companies that had lobbied for the tax holiday claimed that this would allow them to bring money home, increase investment, and hire workers, we found no evidence of those effects,” Forbes said.
The Democrat-led Senate Committee on Homeland Security and Governmental Affairs investigation released in 2011 had similar findings: For the 15 companies that took the most advantage of the provision, the Senate report determined that their jobs in the United States decreased by about 21,000 after the holiday.
Republicans leaders in Congress have argued that the shift to a “territorial” tax system would change the game, creating a permanent fix for companies storing their earnings overseas.
Currently, the “worldwide” tax system means that all US corporate profits earned overseas should be taxed at 35 percent when it is brought back to US accounts. The proposed model would generally not tax profits of US companies that is earned overseas.
In a television interview earlier this month, House Speaker Paul Ryan said the current worldwide tax system is to blame for the trillions kept offshore.
“Unlocking that brings that money home,” Ryan told CNBC.
Rosenthal, from the Tax Policy Center, said he does not expect the territorial system to make a difference in how companies spend their money once they shift it to the United States.Julia Jacobs can be reached at email@example.com. Follow her on Twitter @juliarebeccaj.