NCPA - National Center for Policy Analysis


July 1, 2008

For those who still claim that tax rates don't matter to economic decisions or U.S. competitiveness, the Wall Street Journal presents Exhibit A -- the 2004 American Jobs Creation Act.

This law gave American companies a one-year window in 2005 to repatriate earnings from foreign subsidiaries to the United States at a 5.25 percent tax rate.  Normally companies must pay the 35 percent U.S. corporate tax rate, minus a credit for whatever foreign taxes they paid on those earnings.

The IRS examined the results from this tax cutting experiment and found that the money came back in a flood:

  • More than 800 U.S. corporations repatriated $362 billion from foreign operations.
  • The tax incentive raised $18 billion in 2005, and revenues have continued to exceed estimates.
  • Instead of getting 35 percent of nothing, as U.S. companies kept their cash abroad, the Treasury took in 5.25 percent of the hundreds of billions the companies brought home.
  • This capital infusion may be one reason that U.S. business investment rose 9.6 percent in 2005 -- the highest rate in more than a decade.
  • These dollars are now being invested in the United States, rather than remaining in Europe or China.

One lesson here is how hypersensitive the trillions of dollars of annual global capital flows are to tax rates.  It also underscores how damaging the U.S. corporate income tax is to American firms, says the Journal.  Over the past decade the United States has gone from a below-average corporate tax nation to the second highest rate in the industrial world.  The economic impact is even worse because the United States is one of the few countries that taxes foreign subsidiary income when it is repatriated.

Source: Editorial, "Corporate Tax Cut Windfall," Wall Street Journal, July 1, 2008.

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