Republicans are planning to reward bad behavior by some of the worst corporate actors in the world.
The various Republican tax plans generally grant a huge tax break to corporations for returning their vast stockpiles of cash held overseas back into the United States, often referred to as “repatriation.”
The theory is that corporations would just love to bring back this money and put it to good use by investing it in America to create jobs, which is a dubious premise in itself. But this money would be taxed upon entry into the United States at the standard corporate tax rate of 35 percent, which is significantly higher than the foreign tax havens where the money is now parked. To address this problem, the logic goes, the U.S. should lower its tax rate on money repatriated into the U.S. to encourage corporations to bring it back onshore.
The amount of this money is staggering. Estimates indicate that U.S. companies are now sitting on as much as $2.6 trillion in overseas stockpiles.
But hold on a second. Something doesn’t seem quite right.
The reason these American corporations accumulated such vast piles of cash overseas in the first place is because they were dodging taxes. These companies hired high-priced accountants and lawyers to devise byzantine schemes to avoid paying taxes in the United States.
So the response from Congress, in its infinite wisdom, is to grant a huge tax reduction for these corporations?
Under the GOP proposals, the Senate would reduce the rate for corporate repatriations to from 35 percent to 10 percent, a whopping 71 percent tax cut, while the House would reduce the rate to 14 percent, a 60 percent tax cut. This is an extraordinary corporate giveaway.
The offered explanation is that a lower tax rate is necessary to induce these corporations to bring their money back into the United States. Furthermore, the argument goes, the nation would be better off collecting a lower tax revenue from this reduced rate than collecting no tax revenue at all by the money never being returned to the United States.
Has Congress fallen down the rabbit hole? Just think about the perversity of this logic. Apply it to, say, a thief who steals a truckload of new iPhones. If the thief returns some of iPhones, should he be permitted to keep the rest of them for himself? After all, it would be better to recover some of the iPhones than none at all.
Of course not. Law enforcement would demand the return of every single stolen iPhone. On top of that, the law would punish the thief for stealing the iPhones in the first place with a financial penalty over and above the recovery of the iPhones and perhaps even some time in the clink for good measure.
Otherwise, the law would create a perverse incentive for potential wrongdoers -- and that's exactly the problem with the current repatriation proposals.
Just imagine the decision tree for CEOs all across the nation when contemplating whether to dodge their corporate taxes: “If I don't get caught, then I keep every penny of my tax avoidance. And if I do get caught, I’ll only be required to return some of my ill-gotten gains and keep the rest.”
So, tax-dodging is all upside with no downside. Why wouldn’t corporations keep on doing it?
This is not exactly a desirable outcome. Instead, Congress must shape up here and follow the basic principles of sound tax policy: the carrot and the stick. Good behavior should be rewarded with a yummy carrot, and bad behavior should be discouraged with a painful stick. Dodging taxes is bad behavior. Tax-dodgers should not be rewarded with the carrot of a lower tax rate, but instead should feel the sting of the stick.
Many possible solutions are available. One would be that all money repatriated within one year will simply be taxed at the standard rate of 35 percent, as it should have been at the time it was earned. Any funds not repatriated within one year, however, will be assessed at a higher charge of 50 percent.
Instead of rewarding corporations with a lower rate for their tax-dodging, we should react in the opposite fashion and send corporate boardrooms a clear message that bad behavior will result in unpleasant consequences.
Corporations obviously need a little discipline to help them do the right thing. Now it's up to Congress to provide it.