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I’ll take a corporate tax holiday (any way you slice it) — Congress, lobbyists, and the White House continue to go back and forth on the issue of a corporate tax holiday.  In simple terms, this one-time event would allow U.S. companies to bring offshore cash holdings into the United States at a reduced tax rate, to repatriate it.  Usually, if a U.S. company profits from the sale of goods in a foreign country, and then deposits that profit in a bank within that country, the company will be taxed at the foreign country’s corporate tax rate, not the U.S.’s.  Should that country transfer those monies to its U.S. operations, however, the company will have to pay the I.R.S. the difference between the foreign country’s corporate tax rate and the U.S.’s corporate tax rate.

Let’s take the pharmaceutical industry for example.  Pfizer, for many years, has manufactured much of their Viagra supply in Ireland.  Pfizer then sells their little blue pills and holds their profits in Irish accounts resulting in a measly 12.5% tax rate on those profits.  If Pfizer brings those same profits into the U.S. they would have to pay the I.R.S. somewhere in the neighborhood of an additional 22.5% in taxes, since the U.S. corporate tax rate is around 35% in most cases.  So you can see that Pfizer has just about no incentive to change those Euros into Dollars.

These days, Washington lobbyists and many Republicans (some Democrats too) are urging President Obama to implement a one-time tax holiday that will lower the chunk that the I.R.S. takes from repatriated funds to about 5%.  This, proponents say, would act as a veritable stimulus as large multinational corporations would bring billions and billions of dollars to their U.S. operations.  At first glance this sounds pretty good – more money flowing through the U.S. economy that isn’t being printed by the Fed could spur some much needed growth.  Lobbyists say that the companies would use the financial windfall to invest in creating jobs, factories, and R&D.  So why the White House opposition?

In 2004 the Bush Jr. administration tried one of these tax holidays and reduced the repatriation tax to 5.25%.  Companies, like they are doing now, said they would use the opportunity to create jobs and invest domestically.  What happened, by many accounts, was very different.  Although the holiday legally banned companies from simply returning cash to shareholders, according to a National Bureau of Economic Research paper, “what happened to the $299 billion companies brought back from foreign subsidiaries [is that] about 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.”  Ok, so maybe the 2004 tax holiday can’t be traced back to significant job creation or capital spending, but I feel comfortable asserting that when people saw their IRA’s and brokerage accounts noticeably higher they felt somewhat more comfortable about spending, as opposed to saving.