Bud­get con­fer­ence should skip the repa­tri­a­tion hol­i­day

The Washington Times Daily - - Politics -

The on­go­ing bud­get con­fer­ence be­tween the House and Se­nate gives Congress a rare op­por­tu­nity to get spend­ing un­der con­trol. Con­fer­ees should fo­cus laser­like on achiev­ing that goal. They should not al­low them­selves to be dis­tracted by pol­icy con­cerns un­re­lated to spend­ing.

One bright, shiny ob­ject now tempt­ing con­fer­ees to take their eyes off the ball is the prospect of help­ing Amer­i­can busi­nesses avoid — tem­po­rar­ily — the con­sid­er­able tax bur­den in­flicted on them by our an­ti­quated “world­wide sys­tem” that ap­plies to their for­eign earn­ings.

Cer­tainly relief from ex­ces­sive tax­a­tion is a de­sir­able goal. The world­wide sys­tem is badly out of step with the rest of the de­vel­oped world and is long over­due for re­peal. It sup­presses do­mes­tic in­vest­ment by U.S. busi­nesses, which re­duces jobs and wages for Amer­i­can work­ers.

Some have sug­gested that the con­fer­ence should es­tab­lish a “repa­tri­a­tion hol­i­day” to tem­po­rar­ily cir­cum­vent the world­wide sys­tem. It would al­low busi­nesses to bring their for­eign earn­ings back home, at a sub­stan­tially re­duced tax rate.

U.S. com­pa­nies cur­rently are hold­ing abroad an es­ti­mated $2 tril­lion in for­eign earn­ings. The idea be­hind the hol­i­day is to en­cour­age com­pa­nies to bring that money here, where it would be in­vested in ways that cre­ate jobs and grow the U.S. econ­omy.

The in­stincts of those push­ing a repa­tri­a­tion hol­i­day are good. But even if it weren’t a dis­trac­tion from the much-needed work to curb spend­ing, it would be a bad idea. In prac­tice, a repa­tri­a­tion hol­i­day won’t serve its in­tended pur­pose.

Congress tried a repa­tri­a­tion hol­i­day in 2004. It failed to boost in­vest­ment then, for the same rea­son another hol­i­day would fail to­day. U.S. busi­nesses weren’t cash­con­strained in 2004. They had plenty of do­mes­tic earn­ings, and credit mar­kets of­fered ready ac­cess to cap­i­tal at rea­son­able in­ter­est rates. If com­pa­nies wanted to in­vest, noth­ing was hold­ing them back.

Con­se­quently, when com­pa­nies repa­tri­ated money, they didn’t in­vest it in ex­pan­sion. In­stead, they paid div­i­dends, bought back shares or ac­quired other busi­nesses. There is cer­tainly noth­ing wrong with th­ese ac­tiv­i­ties, how­ever their di­rect im­pact on in­vest­ment, and there­fore job cre­ation, is min­i­mal and un­cer­tain.

To­day, busi­nesses are no more cash-con­strained than they were in 2004. If of­fered another “hol­i­day,” they would likely use the funds the way they did in 2004 — with the same neg­li­gi­ble im­pact on in­vest­ment and job cre­ation.

Be­cause money is fun­gi­ble, there is likely no way to force busi­nesses to use repa­tri­ated funds on any par­tic­u­lar pur­pose, such as in­vest­ment. Nor should Congress try to dic­tate what a busi­ness does with its earn­ings.

More­over, a repa­tri­a­tion hol­i­day would do noth­ing to in­crease in­vest­ment go­ing for­ward. It deals only with pre­vi­ously earned prof­its — funds that busi­nesses have al­ready de­cided how to in­vest or dis­trib­ute.

Yes, chang­ing the tax treat­ment of those pre­vi­ous earn­ings would pro­vide a windfall to busi­nesses. Wip­ing out a big chunk of tax li­a­bil­ity would surely strengthen their fi­nan­cial state­ments. But it doesn’t change their in­cen­tives for fu­ture in­vest­ment. A hol­i­day leaves the world­wide sys­tem in place — pro­vid­ing tem­po­rary relief from the symp­toms, but do­ing noth­ing to cure the un­der­ly­ing prob­lem.

What’s needed is a sys­tem that in­creases the in­cen­tive for busi­nesses to in­vest. Abol­ish­ing the world­wide sys­tem and re­plac­ing it with a ter­ri­to­rial sys­tem would do the trick.

The House Ways and Means Com­mit­tee is hard at work try­ing to do just that.

Though linked in many peo­ple’s minds, a ter­ri­to­rial sys­tem and a repa­tri­a­tion hol­i­day are very dif­fer­ent. The in­evitable fail­ure of a hol­i­day would dis­credit the more ef­fec­tive ter­ri­to­rial sys­tem and make im­ple­ment­ing it more dif­fi­cult.

Those who want to free busi­nesses to in­vest more — to cre­ate jobs and raise wages — should fo­cus on help­ing the Ways and Means Com­mit­tee es­tab­lish a ter­ri­to­rial sys­tem out­side the bud­get con­fer­ence.

Mean­while, the bud­get con­fer­ees should fo­cus on deal­ing with the prob­lem that poses the great­est threat to our na­tion’s eco­nomic growth: ex­ces­sive gov­ern­ment spend­ing.

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