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Bill Clinton Likes It But Corporate Tax Holiday Is “Awful Idea,” David Cay Johnston Says

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

There's "maybe a 50-50" chance of a debt-ceiling deal within the next 48 hours, House Speaker John Boehner reportedly told the Republican caucus Thursday morning.

Closing tax loopholes and reforming Social Security are reportedly on the table as warring politicians try to hammer out a deal that could include up to $4 trillion in spending cuts in exchange for lifting the debt ceiling. (See: Finally, Someone Is Talking Sense On Our Huge Debt And Deficit Problem — President Obama)

There's a good chance any "grand bargain" on the deficit will include a one-time tax holiday to allow U.S.-based corporations to repatriate overseas profits, estimated at more than $1 trillion. The issue has been out of the headlines lately but has the support of a host of Fortune 500 companies, including Apple, Cisco, Duke Energy and Oracle, as well as the U.S. Chamber of Commerce.

In addition, former President Bill Clinton and former White House chief of staff and current Chicago Mayor Rahm Emanuel each recently expressed support for the idea of a tax holiday, Bloomberg reports.

"Providing American businesses with incentives to bring home their global earnings is a common sense solution that could help inject up to $1 trillion into our economy," according to the WIN America Campaign, a non-partisan group lobbying for the cause. "There are few other options available that will help ensure that our recovery endures and that it spreads to Main Street. The likelihood of another stimulus, additional tax cuts, or action by the Federal Reserve is low, and unemployment is still too high."

But Reuters columnist David Cay Johnston, author of Free Lunch and Perfectly Legal and an expert on federal tax policy, says a tax holiday for overseas assets is an "awful idea."

Taxing the System

The "fundamental problem" with a tax holiday is that it sends a message to corporations to "'keep more profits offshore and then you can bring 'em back and pay virtually no tax,'" Johnston says.

Furthermore, there's no good way to ensure that a tax holiday will lead to job creation, he says, citing the last time this was tried — via the 2004 Jobs Creation Act — as evidence of the folly of tax holidays.

Of the roughly $90 billion of profits repatriated in 2004, Pfizer was by far the biggest beneficiary, saving $11 billion in taxes, Johnston recalls. "They started destroying jobs the day they brought it back" and have cut 40,000 U.S. jobs in the ensuing years.

The claim the tax holiday led directly to job cuts is subject to debate, and the WIN Campaign touts the economic benefits of the 2004 holiday. Still, independent studies have shown the bulk of the 2004 tax holiday went to the benefit of shareholders.

There's nothing wrong with that per se, Johnston says. But dividends are preferable to share buybacks, which typically benefit executives with stock options vs. long-term shareholders, he argues.

Meanwhile, tax holidays on overseas assets do nothing for purely domestic-focused companies, which tend to be smaller and family owned, Johnston notes.

"The underlying quest: is our tax system the smart one to have?" he asks. "We live in a global, digital asset economy [and] need to recognize most of what we make is not a fixed asset like a factory you can tax…We need a tax system that reflects that and works with the economy not against it."

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com