Corporate tax dodgers will love Trump’s plan to crack down on corporate tax dodgers

August 21, 2015, 9:34 PM UTC
Donald Trump
Republican presidential candidate Donald Trump fields a question during the first Republican presidential debate hosted by Fox News and Facebook at the Quicken Loans Arena on August 6, 2015 in Cleveland, Ohio.
Photograph by Scott Olson—Getty Images

Donald Trump wants to rein in corporate tax dodgers. But the way he’s suggesting he’d go about it will come as welcome news to corporate tax dodgers.

The front-running Republican presidential candidate has started talking up the need for a tax code overhaul to discourage so-called inversions. That’s the gimmick by which an American company buys a foreign firm in a lower-tax locale and reincorporates overseas to shrink its tax burden.

In an interview with Time this week, Trump got specific about how he’d tackle the problem. Here’s the candidate, from our sister magazine’s sit-down:

I’ll tell you another subject that I’m going to start talking about because nobody talks about it. Corporate inversion, where companies are going over to other places. You know it used to be they moved from New York to Florida, they moved from New Jersey to…Pfizer is talking about moving to Ireland. Or someplace else. We’re talking about Pfizer. Do you know how big that is? It would wipe out New Jersey. I mean that is a massive Merck.

They have $2.5 trillion sitting out of the country that they can’t get back because they don’t want to pay the tax. Nor would I. Everybody agrees that shouldn’t happen. We should let them back in. Everybody. Even if you paid nothing it would be a good deal. Because they’ll take that money then and use it for other things.

But they’ll pay something. Ten percent, they’ll pay something. Every Republican, every Democrat for years they have all agreed … They all agree. So now what’s happening is companies are moving out to get their money. And they’re moving out because they’ll pay lower taxes. That’s a huge problem.

Set aside Trump’s word salad about how Pfizer could “wipe out New Jersey” and whatever he intended to convey about how that relates to “a massive Merck.” The important part of his statement focuses on how he’d stop inversions—and what he appears to be endorsing is a multibillion-dollar giveaway to firms that have stashed their foreign profits abroad.

Trump is arguing that a tax holiday that lets those companies bring home their overseas hauls and pay no taxes on them at all would provide an economic boon simply by injecting the repatriated funds back into the domestic economy. That claim is highly suspect, considering recent history. Congress approved a one-year tax holiday on foreign profits back in 2004, subjecting repatriated funds to a 5% tax rate and a requirement that they be reinvested in activities like worker training and research and development, rather than stock buybacks and executive compensation. But a study of the policy (coauthored by a member of then-President George W. Bush’s council of economic advisers) found that for every dollar companies brought home, they jacked up shareholder payouts between 60 and 92 cents. Money, after all, is fungible. And Pfizer—the single largest beneficiary of that experiment, using it to bring back $35.5 billion in foreign earnings—went on to cut 11,748 U.S. jobs over the next three years.

Nobody else in the Republican field is suggesting it would be wise to bring those profits home without returning any of those dollars to the U.S. Treasury. Even Kentucky Sen. Rand Paul, arguably the most aggressive anti-tax crusader in the bunch, is flogging a plan for a tax holiday that would impose a 6.5% rate on the profits and dedicate the resulting revenue to fund highway projects. Whether such a plan would actually generate a positive return for taxpayers is questionable: the Joint Committee on Taxation, the nonpartisan scorekeeper for tax bills, has said such holidays are long-term revenue losers, because they encourage companies to stash even more of their profits abroad with the expectation they could secure another low-tax holiday down the road. Given that, there is growing bipartisan momentum on Capitol Hill to abandon a voluntary holiday. Instead, lawmakers are circling a plan to force the entire stash home, subject it to a discounted tax rate, and then transition to a system that lightly taxes future overseas profits annually, no matter where those funds end up.

In fairness to Trump, he quickly followed his own scot-free repatriation argument by making clear that firms in fact would need to pay “something.” Details are presumably forthcoming, with Trump pledging to release a tax reform proposal next month. But if its particulars follow the logic he’s been articulating recently, it will undercut the populist message that’s helped fuel his rise to the top of the Republican heap.

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