Yet another Reason for Tax Reform
February 23, 2015
The Highway Trust Fund is slowly going broke, and, true to form, Congress and the president are considering a temporary solution to a long-term problem. The Highway Trust Fund, used to build and maintain America\'s roads, is funded by revenue from the gas tax. But as American cars have become more efficient, the tax generates less revenue because consumers are purchasing less gas.
Curtis Dubay, research fellow at the Heritage Foundation, says two tax-related solutions have been proposed to solve this problem: a tax repatriation holiday and a tax hike on foreign earnings. Both options, says Dubay, are bad policy.
When American companies operating abroad bring their earnings into the United States, they are taxed on those foreign earnings. A tax repatriation holiday would allow companies a "holiday" period during which foreign earnings can be repatriated to the United States at a lower rate than the current corporate income tax rate. Such a holiday would not increase investment in the United States. Business have already decided how to spend the earnings and this policy would simply be a tax windfall. Even if the earnings were distributed as a dividend to investors, this would not create investment. It would simply change where the money lies: the stock price should already reflect the foreign earnings.
The second policy, "deemed repatriation," is a much more heavy-handed tactic, which would be compulsory for all companies. This new policy would tax foreign earnings of companies as if these earnings had been repatriated. A tax is immediately applied to all of the funds held overseas, whether or not they are brought back to the U.S. Such a policy is functionally a retroactive tax and a tax hike. Such drastic changes to tax policy should be carefully considered. Therein lies the largest problem with the repatriation holiday: it provides a temporary solution to a persistent problem and draws attention away from sensible tax reform, which the new Congress should focus on.
Moreover, rather than a tax hike, the government could quit spending Highway Trust Fund money on things like hiking trails, ferries, sidewalks and landscaping. The Wall Street Journal reports that if lawmakers used the Highway Trust Fund solely for highway funding, it would be 98 percent solvent.
Source: Curtis Dubay, "Changes to Repatriation Policy Best Left to Tax Reform," Heritage Foundation, February 17, 2015.
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