Corporate Tax Holiday: A Jobs Creator?

September 7, 2011

Wall Street Journal

John D. McKinnon

A corporate tax holiday for U.S. multinationals could create about 2.9 million jobs – roughly the same amount as the 2009 stimulus legislation – according to a new study sponsored by backers of the idea. And it would come at only a small fraction of the cost to the government, the study argues.

The study, prepared for the U.S. Chamber of Commerce and set for release on Wednesday, provides new ammunition for supporters of the tax holiday, including some of the country’s biggest high-tech firms. It comes at a crucial time as Washington considers ways to pump up the flagging economy. It was prepared by Douglas Holtz-Eakin, a former director of the Congressional Budget Office and former Bush administration economic adviser.

The tax holiday would temporarily lower the tax on multinationals’ overseas earnings to as little as 5% or so, from the current top rate of 35%. That would encourage U.S. companies to bring back hundreds of billions of dollars to the U.S. that they have parked offshore. That in turn would stimulate new investment and hiring, according to backers.

But Obama administration officials and many congressional Democrats – along with a few Republicans – have opposed the so-called repatriation idea. They worry that giving multinationals a temporary tax break on their overseas income could further skew business incentives, and encourage U.S. companies to continue parking their earnings offshore, out of reach of the U.S. government, until Congress declares another tax holiday.

A tax holiday also could sap momentum from a drive for a comprehensive corporate tax overhaul, according to critics. Opponents also say a similar tax-holiday measure passed in 2004 actually produced little in the way of new investment and jobs.

The new study takes aim those critics, saying they have failed to take into account the broader benefits of all the additional money sloshing around in the economy.

It concludes that “the short-run stimulus provided by those dollars [is] difficult to project with great certainty but would speed the pace of economic recovery, increase GDP by roughly $360 billion and create approximately 2.9 million new jobs,” according to a draft.

The study concludes the tax holiday would cost only a fraction of the 2009 stimulus, known as the American Recovery and Reinvestment Act, which cost around $825 billion. “Estimates…suggest that unlike the ARRA, which increased the deficit dollar for dollar, a repatriation approach to stimulus would only cost about 16 cents on the dollar,” it says.

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