Rand Paul Finds Democratic Partner for Offshore Tax Holiday

(Bloomberg) — Senators Rand Paul and Barbara Boxer are proposing a tax incentive for U.S. companies to bring home their offshore cash stockpiles and pledging to use that revenue to fund highways.

The bipartisan proposal would let companies repatriate money parked overseas at a 6.5 percent tax rate, a steep discount compared with existing law.

“This would mean no new taxes, but more revenue, and it is a solution that should win support from both political parties,” Paul, a Kentucky Republican, said in a statement Thursday in Washington. Boxer is a California Democrat.

The proposal was quickly criticized by the head of the tax-writing Senate Finance Committee, Republican Orrin Hatch of Utah, who said it wouldn’t actually yield more money for the government and thus is “bad policy.”

“Tax holiday proposals designed to pay for the transportation bill sound great until you look at the details,” he said in a statement. “Saying you’re going to use something that loses money to pay for anything is just wrong.”

President Barack Obama also has proposed using tax revenue from stockpiled offshore profits to fund infrastructure, but his plan is very different from the Paul-Boxer proposal. The president is insisting on permanent changes to the international tax system to make it harder for companies to push future profits overseas.

Joint Committee

Under current law, U.S. companies must pay the full 35 percent tax rate when they bring home profits from overseas, after receiving credits for foreign taxes they have paid. Because they can delay that tax until they repatriate, the tax code gives them an incentive to book profits overseas and leave them there.

It’s not clear that the Paul-Boxer plan would actually raise revenue. The nonpartisan Joint Committee on Taxation, the official scorekeeper for tax bills, said last year that a similar proposal would raise money in the first few years and then cost the government a net total of $95.8 billion over a decade.

That’s because companies would interpret a repeat of a tax holiday enacted in 2004 as a sign that they should shift even more profits outside the U.S. in anticipation of another holiday.

U.S. companies have stockpiled about $2 trillion outside the country, in part because that’s where they’re earning profits and in part because they have used accounting maneuvers to book profits in low-tax jurisdictions.

Fair Share

The Boxer-Paul proposal lets companies avoid paying the full tax bill they owe, said Senator Bernie Sanders, a Vermont independent who caucuses with Democrats.

“I think that they should pay their fair share of taxes,” he said on C-SPAN’s “Newsmakers,” airing this weekend, as he advocated a financial transactions tax instead. “There are fair and progressive ways to raise revenue.”

Companies including Apple Inc., Qualcomm Inc. and Google Inc., all based in Boxer’s home state, lobbied Congress in 2011 for a repatriation tax holiday. They didn’t succeed.

At the end of 2013, Google had $38.9 billion that hasn’t been subject to U.S. taxes. As of Sept. 28, 2014, Qualcomm held $25.7 billion outside the U.S., allowing the company to defer $9.1 billion in taxes.

Obama’s proposal resembles a tax revamp plan released last year by former Representative Dave Camp of Michigan, then the Republican chairman of the House Ways and Means Committee.

Plans’ Similarities

Jason Furman, chairman of Obama’s Council of Economic Advisers, cited the similarities between Obama’s and Camp’s plans as a sign that the parties may be able to agree on a revision of the business tax system.

“Everyone is taking seriously the issues associated with base erosion using minimum taxes on overseas earnings to get at those issues,” he told Bloomberg editors and reporters in Washington Jan. 23.

The Paul-Boxer proposal wouldn’t change the underlying tax system, though it would limit companies from using repatriated profits to boost executive pay or buy back stock. Companies that invert — or move their tax address outside the U.S. — within 10 years would have to repay the tax break with interest.

Companies would have up to five years to bring home the profits.