RELEASE: Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue

It is true that for accounting purposes, multinational corporations keep profits off of their U.S. books. But in the real world, that money is often deposited in U.S. banks, circulating in the U.S. economy, and available for a wide variety of domestic investments. For nearly all practical purposes, that money is already here, being put to work in the United States. But as co-authors Kitty Richards and John Craig point out, while profits characterized as overseas for accounting purposes may be little different economically from other profits, due to a provision known as deferral, these profits can accumulate for years, sometimes indefinitely, without being taxed. In fact, according to Joint Committee on Taxation estimates, this costs the federal government $50 billion per year, and this cost is growing over time as corporations find ever more creative ways to make their U.S. profits look like offshore income.

“While we all wish that there were a pot of gold at the end of the offshore profits rainbow, the reality is that there is no free stimulus to be had by ‘bringing the money back home’ because the money is already here,” said Marc Jarsulic, Vice President of Economic Policy at CAP. “For too long, some advocates have been capitalizing on the confusion around these untaxed profits by pushing for policies such as repatriation holidays that shift profits back to domestic shores. Make no mistake, these special tax breaks will only provide a windfall to the corporations, causing the government to lose even more revenue while having no positive effect on the economy. What corporations are not doing is paying taxes on these profits. That is the problem that policymakers should focus on.”

The deferral of taxes on overseas income is one of the most expensive tax expenditures in the corporate tax code. It also creates an incentive at the margin to move real economic activity—jobs and assets—to low-tax jurisdictions. Unlike “trapped profits,” these are real problems worth addressing. The report’s authors point out that one potential solution is to simply repeal deferral. Taxing all profits in the same way—whether they are booked in Iowa or Ireland—would increase corporate tax revenues, reduce the incentive to move jobs and assets to low-tax jurisdictions, and put a stop to unproductive profit-shifting games.

There are a number of other reforms that could raise revenue and improve economic efficiency, including:

• A minimum tax on the earnings of U.S.-controlled foreign subsidiaries, as President Barack Obama proposed in his “grand bargain” for jobs and the Center for American Progress previously reported on, would raise revenue while minimizing the incentive to relocate in tax havens.
• The discussion draft on international tax reform recently released by Senate Finance Committee Chairman Max Baucus (D-MT) would similarly transition away from the current deferral regime while strengthening the rules that prevent international profit shifting.
• Sen. Carl Levin’s (D-MI) Stop Tax Haven Abuse Act would raise more than $200 billion over the next 10 years through sensible reforms.

Unfortunately, the proposals currently getting the most attention and being lobbied for the hardest by multinationals—versions of repatriation holidays and moves toward “territorial” taxation—are policies that would actually increase the distortions created by deferral, increase tax-avoidance opportunities, and decrease corporate tax revenue. These proposals will not stimulate growth, investment, or hiring; they will just lavish more tax cuts on profitable multinationals.

Read the report: Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue by Kitty Richards and John Craig