Top aides to President Donald Trump argue that tax relief for the accumulated foreign earnings of US-based multinational corporations would be a boon for US workers. But data show that providing such a tax break, which is likely to be a key element of the tax plan being written by the White House and congressional Republicans, would mostly benefit high-income US taxpayers and foreigners, not US workers.
Such a provision would allow US-based multinationals to repatriate untaxed foreign earnings at a special low tax rate. These corporations over many years have booked more than $2.6 trillion of their profits off-shore, but they’ve been allowed to defer paying the 35 percent US corporate tax due on these profits as long as they are not repatriated to the US parent firm.
A “one-time” repatriation holiday in 2004 taxed $299 billion of accumulated offshore profits that were repatriated to the parent firm at a preferential 5.25% rate. Backers promised the tax break would deliver jobs and investment but instead multinationals used the repatriated funds to pay dividends to shareholders and buy back their stock. In fact, the largest participants in the 2004 repatriation holiday cut jobs and research. Once the holiday ended, the multinationals went right back to accumulating earnings off-shore (and even stepped up the effort), anticipating another tax holiday.
Earlier this month, White House National Economic Council director Gary Cohn offered a new rationale for a tax break on accumulated offshore earnings: “The biggest public pension funds are the biggest owners of equities in the world. They’re the policemen, they’re the firemen and the teachers . . . So yes we’re helping Americans by delivering returns back to them.” But Mr. Cohn’s spin is wrong: A low tax rate on foreign earnings repatriated to the parent firm will not deliver any returns to policemen, firemen, teachers, and other participants in defined benefit plans (because an increase in the value of the assets held by these plans does not increase the ultimate pension payments promised to the beneficiaries). Such a policy shift delivers a windfall to the beneficiaries of defined contribution plans, because an increase in the value of assets held by these plans increases future distributions to beneficiaries. But defined contribution plans are held disproportionately by high-income individuals, not typical wage workers. Another large group that would benefit are foreigners, which are the next largest block of shareholders of US corporations behind pension funds. (Taxable U.S. shareholders hold the third largest block, about 25 percent).
Now for some pension background: There are two basic forms of retirement plans—defined benefit (DB) plans which are typically thought of as traditional pensions and defined contribution (DC) plans, which include 401(k) plans and IRAs. Defined benefit plans pay annuities to retired workers but these payments are promised by employers and based on years of work and earnings – they do not depend on the returns on assets held by the plan or by the employer directly. (However, the windfall from a reduced tax rate on accumulated offshore earnings might increase the likelihood that employers meet their promised retirement obligations to their employees). By contrast, the returns on assets held in DC plans and IRAs flow directly to the beneficiaries.
At one time, private and public employers mostly provided defined benefit plans, but now most DB plans are provided by public employers for public servants, like those police officers, fire fighters, and teachers. Over the last few decades, private sector employers have gradually shifted to 401(k)-like DC plans. DC plans and IRAs now hold about $15.5 trillion, almost twice the assets in both government and private-sector DB plans. And, for corporate equities, in 2015, 8 percent of US stock was held in DB plans while 15 percent was held in IRAs and 14 percent in DC plans. Finally, higher-income individuals hold more assets in DC plans than do lower-income individuals. For example, at the end of 2014, taxpayers with adjusted gross income of $75,000-$100,000 had an average IRA balance of $112,000 while those with AGI of more than $1 million had an average IRA balance of $438,000.
A retroactive tax cut for U.S. corporations goes solely to existing shareholders. The Tax Policy Center estimates that 76 percent of the benefits, including the benefits through retirement plans, of a retroactive cut in corporate taxes would go to people in the top fifth of the income distribution (those with annual incomes above $150,000) and 40 percent to the top 1 percent (above $725,000).
Cohn is correct when he says retirement plans would benefit from a lower tax rate applied to accumulated foreign earnings, since they hold a large share of stock in US corporations. But, the DB plans do not pass additional returns through to police officers, fire fighters, and teachers. Only DC plans pass additional returns through to beneficiaries.
Foreign investors will also be big winners from a tax break provided for deferred foreign earnings. They own about 26 percent of US stock, substantially more than the stock held in defined benefit plans. So, the windfall from a repatriation holiday would directly benefit foreigners more than middle-income retirement participants. Why should foreigners get a greater windfall from our tax reform effort? Maybe we need an “America First” tax plan.
