All week, Senate Finance Committee Chairman Max Baucus' (D-Mont.) staff have been releasing discussion drafts on tax reform. The international discussion draft contains an interesting provision that invites a comparison with recent tax history. The draft proposes:
Earnings of foreign subsidiaries from periods before the effective date of the proposal that have not been subject to U.S. tax are subject to a one-time tax at a reduced rate of, for example, 20%, payable over eight years
Here's what this means: let's say you're a large, multi-national company that has lots of business done overseas. You've invested there, earned profits there, and paid taxes to those foreign governments. For most of the world's companies, that's the end of the story–after all, what remains is after-tax dollars.
But what Chairman Baucus proposes is for the IRS to take another 20 percent of this money–money which has already and appropriately faced taxation in the country where you earned it. It's true that this second layer of taxation could be paid over eight years, but that's hardly the point.
There is likely well over $1 trillion in after-tax earnings sitting overseas today. One big reason companies don't bring this money back to the U.S. is because they would have to pay taxes on the difference between the U.S. rate (over 39 percent when states are included), and whatever rate they already paid overseas (the OECD average is just under 25 percent).
Slapping a 20 percent tax rate on this money is a huge cash grab by Washington. It would be a tax increase of over $200 billion, payable over the next eight years. This, in turn, would mean less money for companies to spend on creating jobs, investing in new plant and equipment, funding pension plans, etc.
Contrast this to a successful "repatriation" regime, the one which occurred in 2005. For that one year only, companies could voluntarily bring after-tax overseas earnings back to the United States and face an IRS double-tax no higher than 5.25 percent. With this positive incentive, about $320 billion was brought back, resulting in a pro-growth cash windfall to the Treasury of about $17 billion. This money was used for things like paying down debt, funding pensions, and deployment of new investment.
That's the model that tax reform should use, not a greedy cash grab by Washington.