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Is a Tax Repatriation Holiday a Good Idea?

The 2004 holiday didn't work as intended, and there's little reason to believe another one will be any different.

People across the political spectrum agree that the corporate tax system is broken. When Fortune 500 companies are stockpiling $2.6 trillion in cash offshore, it's easy to understand why.

One potential solution reportedly being lobbed about the White House halls—even making an appearance on presidential advisor Steve Bannon's dry erase board of political promises—is a one-time "Tax Holiday." In theory, this would allow corporations to bring back cash hoarded abroad at a much-reduced rate. The rate is currently (sort of) 35 percent, so bringing it back at a rate of 10 percent would be a massive boon.

The positives of such a move are obvious. Currently, the country—that is to say, the United States Treasury—has exactly zero percent of that $2.6 trillion overseas. Even if the country takes a net loss of 25 percent, it'd still be getting a whole lot more than zero dollars to inject into the economy.

But the negatives of such a move aren't so clear. For starters, while the money would return to the U.S., there is no evidence that it would be used to create jobs.

"If there are good investment projects, companies that have cash overseas very easily borrow domestically to make those investments happen," says Jennifer Blouin, an accounting professor at the University of Pennsylvania's Wharton School. "The reality is, there's not much profitable investment they want to do in the U.S."

In other words, Apple isn't punting plans to develop in the U.S. because its money is stuck offshore; it can borrow whatever it needs. In reality, there's no real basis for a tax holiday to be sold as a job creator. This isn't a theoretical. These are clear lessons from the one other time the U.S. tried a tax holiday, back in 2004.

"What happened [in 2004] is exactly what one would expect," says Edward Kleinbard, professor of law and business at the University of Southern California Gould School of Business. "The money went to stock buybacks and dividends, and did not result in a net investment in the United States."

This isn't necessarily a bad thing. Shareholders pay taxes on the money they're receiving from buybacks, which worms its way into the economy. And, again, any number is greater than the zero currently making its way over from the offshore stockpiles. But the most damning lesson from the 2004 tax holiday is that, rather than solving the problem, it actually made it a hell of a lot worse.

While the annual increase in overseas cash was roughly $500 million in the years before the tax holiday, the number tripled to nearly $1,500 million in the years after.

Putting yourself into the mindset of a corporation is relatively easy to do: Try to make the most money you can. Think of the lesson you'd learn if the government offered a one-time tax holiday to coerce you into bringing money back. Would you conclude that you had better not hoard the money offshore anymore? Or would you prepare to continue doing exactly the same thing once the day was over? Unsurprisingly, corporations chose the latter option. While $300 billion came back to the U.S. in 2004, it didn't stay here for long.

"After the holiday, much more than $300 billion went out again," says Thomas Brennan, a law professor at Harvard University who, in 2010, examined the effects of the 2004 tax holiday. "And [overseas cash] has been building up ever since."

In fact, Brennan found that, while the annual increase in overseas cash was roughly $500 million in the years before the tax holiday, the number tripled to nearly $1,500 million in the years after.

"The holiday ended up rewarding the most aggressive tax planners, and as a result of that one-time never-to-be-repeated holiday, every U.S. multinational assumed there'd be a second holiday, and a third holiday," Kleinbard says. "Another repatriation holiday is an idea with no redeeming values whatsoever."

That isn't to say the idea shouldn't have a place in the overarching solution to the tax problem. It might work if it was used in conjunction with broader and long-lasting tax reform. Perhaps, in order for corporations to join whatever new, stabilized system is created, the first step is repatriation, even if it's at a lower rate than the current 35 percent.

"What you do by just saying, 'We'll let [overseas cash] build up and become such a pressure point' is, you create uncertainty," Blouin says. "So why not just change the system?"

But another one-time tax holiday that isn't attached to a substantive overhaul? That'd just make everyone very proud of themselves for pouring a bucket of water on the blaze.