Aides to president-elect Donald Trump as well as key lawmakers are promoting a three-way deal that would include business tax reform, a tax break for untaxed foreign earnings of US-based multinational corporations, and hundreds of billions of dollars in new spending for roads, bridges, and other public infrastructure. I get the politics, but I just can’t follow the math.
The politics is simple: A big pot of infrastructure money might be a way for Republicans to entice Democrats to sign on to a tax cut they’d otherwise oppose. This could be especially important in the closely-divided Senate.
But there is that math problem. In short, lawmakers seem to want to use the same money to achieve two entirely separate goals—buying down corporate tax rates and paying for those roads. Many amazing things happen to money in Washington, but using the same cash twice may be beyond even Congress and the president.
The more closely you look at this the more it looks like the street corner shell game people used to play in New York years ago: You know, the one with two plastic crates, three dixie cups, and a little ball.
The game is apparently making a comeback on the streets of New York, and it seems to be finding favor in the halls of Washington. The cups move pretty fast, so let’s look at the elements of this swap one step at a time.
First, there is the repatriation tax. US-based multinationals currently owe 35 percent US income tax on their foreign earnings. However, they are allowed to defer that tax until they repatriate the money to the US. The best estimate is that more than $2 trillion in old earnings is currently untaxed.
Trump would tax that money at a maximum rate of 10 percent, payable over 10 years, whether it is brought home or not. The concept is hardly new. President Obama and most of this year’s GOP presidential contenders proposed their own versions.
Congressional budget scorekeepers treat that tax cut as new revenue, assuming most of the tax would never be paid otherwise. Some outside analysts call this an illusion but for the moment, let’s assume it is true. Multinationals might owe in the neighborhood of $200 billion over a decade if the Trump tax passed, assuming no other changes in corporate taxes. But remember, it is likely to be a one-time tax and if Congress passes Trump’s proposed 15 percent business tax rate, there would be little reason for firms to keep future earnings overseas.
What to do with the money? Buy down corporate tax rates? Or pay for those roads and bridges?
Trump’s 10 percent tax would finance about a 2 percentage point cut in the corporate rate, from 35 percent to 33 percent. Using a one-time tax to finance a permanent rate cut is fiscally irresponsible. But without it, Congress would have to make real, politically difficult cuts in corporate tax preferences to pay for a rate cut that does not lose revenue.
Then there is infrastructure. In 2014, Rep. John Delaney (D-MD) proposed a similar swap. Now Trump aides seem to be toying with the idea.
Investment banker Steven Mnuchin, who was Trump‘s campaign finance director and is a rumored to be on his short list for Treasury Secretary, has floated the idea of marrying an infrastructure bank to tax reform, though he has not described how, according to Politico. Trump derided such a bank when Hillary Clinton proposed one during the campaign.
Two other Trump economic advisers, private equity investor Wilbur Ross and University of California-Irvine business professor Peter Navarro have proposed another iteration. It would work roughly like this: They figure $1 trillion in new infrastructure would require about $167 billion in new equity (the rest would be borrowed). The federal government would subsidize that equity stake with an 82 percent tax credit. By investing in these infrastructure deals, US-based multinationals could use the new tax credit to wipe out any tax liability on their unrepatriated foreign earnings.
Ross and Navarro argue that the credit would pay for itself through taxes on the new income earned by contractors and construction workers. Such an explosion of new revenue seems to rely on the questionable assumptions that these contractors and workers are not otherwise working and that these projects would not be built otherwise. To the degree it fails to produce the promised revenue, the repatriation tax would merely fund the tax credit, leaving less to buy down those corporate rates.
House Ways & Means Committee Chairman Kevin Brady (R-TX) isn’t fooled by any of this. At a post-election conference sponsored by Bloomberg BNA and KPMG, Brady warned that the repatriation money is already spoken for: “In our blueprint, we applied those revenues to more growth and more competitive rates."
But others, perhaps enticed by the same quick cash that attracts people to shell games, seemed convinced that the repatriation tax can grease both a big corporate tax cut and build all those new roads. It might do one or the other, but it cannot do both.
