Congressional Republicans consistently push tax cuts for corporations and the wealthy as a means to create jobs. One measure that is receiving increased attention is a tax break for corporations that park profits overseas to avoid paying taxes. Despite Republicans' insistence that a tax holiday would bring these profits back to the U.S. and that corporations would then invest in jobs here, the evidence tells a different story.
A recent report by the Federal Reserve noted that private companies remain cautious about making new investments because of concerns about a “weaker and more uncertain economic outlook” over the coming months, but the decision to refrain from investing is not the result of a lack of funds.
In fact, many large corporations are flush with cash. According to the Wall Street Journal, “Corporations have a higher share of cash on their balance sheets than at any time in nearly half a century, as businesses build up buffers rather than invest in new plants or hiring.” Businesses are holding more than $2 trillion in cash and other assets. These companies could hire, but they are choosing not to because consumer demand for their products is weak. Another tax cut would increase corporations’ cash reserves but provide no incentive to hire.
Tax cuts generally do not stimulate the economy as much as government spending. An analysis of the spending in the American Recovery and Reinvestment Act (Recovery Act) conducted by the independent Congressional Budget Office (CBO) found that the tax cuts contained in the Recovery Act had little stimulative effect on the economy (returning about 50 cents on the dollar), with corporate tax cuts having the least impact.
Similarly, the Congressional Research Service (CRS), Congress’ independent research arm, found that “GDP growth, median real household income growth, weekly hours worked, the employment-population ratio, personal saving, and business investment growth were all lower in the period after the [Bush] tax cuts were enacted” than before those cuts took effect.
Despite this evidence, Republicans and some Democrats are calling for another “stimulative” tax break, proposing a so-called repatriation tax holiday, which would temporarily but significantly lower taxes on foreign income from 35 percent to 5 percent. This, supporters say, would encourage corporations to bring profits currently stashed offshore back home, generating more income that could be used for hiring. A similar holiday was established in 2004, and the results were dismal.
A CRS report noted that “while empirical evidence is clear that this provision [the tax holiday] resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment.” In other words, while the tax cut worked to bring money to the U.S., it did little to actually help the economy. In fact, a Senate report on the 2004 tax holiday found that it may have done more harm than good, noting “the 15 companies that benefited the most … cut more than 20,000 net jobs and decreased the pace of their research spending.”
The push for another tax holiday as a “job creation plan” flies in the face of all evidence. Such tax breaks will only increase the deficit and add to the pressure on lawmakers to further reduce spending. In fact, the CBO report on the Recovery Act and a wealth of other studies show that direct government spending on infrastructure projects has the largest multiplier effects on the economy, grows jobs, and significantly expands GDP. A serious push to move forward with such projects would do far more to spur significant economic growth than any tax holiday.