According to many researchers, the key to stimulating a struggling economy lies in increasing domestic investments, not in providing a tax holiday for U.S. multinational firms. Roy Clemons, doctoral graduate from Texas A&M University’s Mays Business School, is one supporter of this claim. Recently, his research on the pros and cons of enlisting a tax holiday for U.S. businesses operating overseas has been a focus in the media and was cited in a debate on the Senate floor.
Clemons’ 2008 dissertation focused on a tax holiday for repatriation provided under the Jobs Act of 2004. With the help of Mays Associate Professor of Accounting Michael Kinney, Clemons studied the results of a previous congressional decision to cut U.S. multinational firms a break when they decided to send their foreign profits back to the United States (repatriation). The tax holiday decreased the tax rate paid by these companies tremendously, enabling foreign investing companies to retain a significantly larger profit. The downside to this, notes Clemons, is that though firms appear to have responded to the opportunity to reap tax savings from the Jobs Act, they didn’t use the funds to increase domestic investment. Thus, the research suggests that the tax holiday was ineffective in achieving the Jobs Act’s intended objective of increasing domestic investments.
Congress recently considered bringing back the tax holiday for repatriations, causing controversy on the Senate floor. On February 3, a provision to grant a repeat of the tax holiday offered under the Jobs Act of 2004 was debated, citing the research of Clemons and Kinney. Clemons also provided his opinion on how his research should contribute to the future of the U.S. international tax policy. “Senators from both sides of the debate indicate that the U.S. international tax policy will be reformed, and my research provides Congress with empirical data to evaluate the deficiencies that exist under the current U.S. international tax system,” said Clemons. “Fixing ineffective policy would help U.S. firms to become more competitive, and it would also help the government to use its resources more efficiently.”
Congress denied a resurgence of the tax holiday for repatriations granted under the Jobs Act of 2004, placing Clemons’ research in an influential role that helped settle the debate. The research contributed to the argument that the current system encourages firms to shift their income to low-tax jurisdictions to avoid U.S. taxation. Clemons feels that existing tax deferral for repatriations will soon be eliminated from the tax code under President Obama’s economic plans.
