Back when Democrats thought Hillary Clinton was going to win the election and face the need to deal with a Republican House, they had a plan for legislation that would combine an aspect of corporate tax reform with a push to increase infrastructure spending. Ideological liberals didn’t really like the plan, and neither did ideological conservatives. But it’s an interest group bonanza with bipartisan appeal, funneling tons of cash into the pockets of technology company shareholders and building trade unions alike. And if you squint at it right, it manages to spend a bunch of money without increasing the deficit or raising interest rates.
Trump could borrow Hillary Clinton’s plan for a bipartisan deal on taxes and infrastructure
It’s not a very good plan. But it is a plan.
Photo by Ron Sachs-Pool/Getty Images
It wasn’t a great idea, but it was an idea that could realistically garner bipartisan support and show that the Clinton administration was getting things done.
Now that the Trump administration finds its efforts to embrace Paul Ryan’s agenda and priorities have left it floundering, it may want to steal the idea. The precise configuration of political forces isn’t what Democratic Party leaders were expecting. But the basic imperative to get something big done that can attract bipartisan support remains the same.
Meet “deemed repatriation”
The key to unlocking a potential deal is the $2.5 trillion in cash that American companies are holding in foreign subsidiaries.
That foreign cash stockpile is itself the result of three separate aspects of the US corporate income tax code working together in a dysfunctional way. One is that the United States, unlike most developed countries, seeks to tax US-based firms on their worldwide profits rather than only on their domestic profits. Another is that the United States, unlike countries that only tax domestic profits, makes it very easy for companies to engage in “earnings stripping” behavior that locates the profits of big multinational corporations in low-tax jurisdictions such as Ireland, Luxembourg, and the Cayman Islands. The third is that while the United States does tax the profits of your Irish subsidiary, it only does so when the cash is transferred from the subsidiary back to the main company.
The result of all this is that big multinational companies have strong incentives to engage in various shenanigans aimed at amassing profits that are then held tax-free in their foreign subsidiaries. The hope is that one day Congress will cut corporate income taxes, at which point the money can be “brought home” and paid out as dividends to shareholders.
Some companies, such as Apple, go so far as to borrow large amounts of money domestically to finance dividend purchases, even while amassing offshore cash. Bringing money home and paying taxes on it is considered a sucker’s move.
There are two ways Congress can exploit this offshore cash to raise money while cutting taxes.
- One is what’s known as a repatriation holiday. Congress could create a special window of time during which overseas cash could be brought back home at a discount rate. Corporate America would pay the discount rate, and shareholders would get dividends that they also pay taxes on. This would increase short-term revenue, while giving a huge break to CEOs and wealthy shareholders. Congress tried this in 2004 on the theory that it would lead companies to boost investment and create jobs. That didn’t happen, according to a landmark study by Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, who found that “repatriations did not lead to an increase in domestic investment, employment or R&D, even for the firms that lobbied for the tax holiday stating these intentions.” Later studies agree.
- The other option, which has gained popularity since the repatriation holiday concept has been largely discredited, is that you could permanently cut the tax rate on foreign profits and then retroactively apply the new lower rate to foreign-held cash, which would be “deemed” repatriated for tax purposes. In this new scheme, Congress would straightforwardly admit that the purpose of the repatriation is to generate tax revenue, with the investment coming from spending the money on infrastructure rather than from the businesses themselves.
An idea with bipartisan appeal
Back in 2015, Sens. Rob Portman (R-OH) and Chuck Schumer (D-NY) released a framework for international business tax reform that incorporated this deemed repatriation idea. The framework lacked key specifics, so it would be a mistake to characterize it as a done deal. But their framework did secure endorsements from a bipartisan group of senators including Pat Roberts (R-KS), Sherrod Brown (D-OH), Mike Enzi (R-WY), Tom Carper (D-DE), John Cornyn (R-TX), and Mark Warner (D-VA).
Speaker Paul Ryan, tellingly, also offered supportive words.
This didn’t get done back in 2015 for a few big reasons. One is that Mitch McConnell thought working on a bipartisan international tax reform plan was a mistake, and Republicans should use the whole issue as leverage for a larger tax agenda. The other is that President Obama thought this was bad policy, and Harry Reid had his back.
But with Obama and Reid out of the picture, and Schumer taking over as top Democrat, things look different. Schumer was indicating last fall that he thought Clinton would take a different view of his dealmaking efforts, Bill and Hillary Clinton had both expressed sympathy for various repatriation schemes in the past, and Clinton’s transition team was looking at this as a rare example of legislation they thought would be doable with a Republican House. The basic thought was that having lost in 2016, Republicans would know they had to give up on their grand tax-cutting dreams and suddenly a modest corporate tax cut would look pretty good.
The simplest thing to do with the money would be to just take the transportation funding formula already written into law by the 2015 surface transportation bill and make the numbers bigger. More recently, Senate Democrats wrote a $1 trillion infrastructure bill that takes a broader view and includes things like $75 billion for school construction and $110 billion to upgrade local water systems. During his confirmation hearings, Commerce Secretary Wilbur Ross said that projects to bring broadband internet to rural communities could be part of the Trump administration’s definition of infrastructure. One reason members of Congress might want to get in on the dealmaking would be the ability to influence what the money gets spent on.
A good deal but questionable policy
Sen. Elizabeth Warren characterized any form of discount repatriation as a “giant wet kiss” to tax avoiders, and it’s hard to say that she’s wrong.
When you’re talking about cutting taxes in the future, you are making a trade-off between lost revenue and creating stronger future incentives to invest and earn. But cutting taxes on profits that Apple, Pfizer, Microsoft, and others have already earned doesn’t create any kind of useful incentives. In the larger Schumer-Portman context, companies would enjoy a lower tax rate on foreign earnings in the future in exchange for the taxes being actually collected. That makes a fair amount of sense, but if anything it argues for past earnings “deemed” repatriated to be taxed at a penalty rate, to encourage companies to comply with the new scheme rather than holding out again. At a minimum, you’d want to at least retroactively collect the full 35 percent.
What’s more, while the economy has recovered enormously from the deep doldrums of five or six years ago, interest rates remain incredibly low by historical standards.
If you had a few hundred billion dollars’ worth of genuinely useful infrastructure projects to fund, there would be no problem with simply borrowing the money. The difficult thing on the merits is actually working out the infrastructure part in a way that makes sense.
But from a basic dealmaking perspective, it’s perfect. There are lots of business lobbyists out there who would love to deliver a nice repatriation win to their bosses. There are lots of stock owners who would love to see that corporate cash brought onshore and paid out as dividends. And there are plenty of Democratic-leaning interest groups — unions most of all — that would love to see a big chunk of change spent on construction projects. “Infrastructure,” meanwhile, is a sufficiently vague category that even without the dream earmarks you can shape the contours of the spending to fit the priorities of fence-sitting legislators.
Last but by no means least, there are plenty of Democrats holding seats Trump won who’d like to find something to agree with the president on that isn’t offensive to their base. And having been foiled in court on his visa restrictions and in the House on his Obamacare repeal, Trump would probably like to show that he can get something done. Funding an infrastructure boost with an international corporate tax tweak isn’t an idea that wonks of any stripe love. But for a president looking to do something, this is something that it seems like could be done. And that may be good enough.
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