Lessons from Argentina: Tax Holidays

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The Wall Street Journal reported yesterday on the latest plan to shore up our country's finances and jumpstart the economy: A new tax-repatriation holiday. The holiday would involve drastically lowering taxes on corporate profits for companies that choose to bring assets back into this country. (It's common practice for big companies to store most of their cash in tax havens in order to avoid paying the 35 percent corporate profit tax. This is how large companies like GE and Google manage to pay almost nothing in taxes.)

On the surface, a tax holiday sounds pretty good. After all, if it works, at least the U.S. treasury gets a little bit of money, and the rest of the cash that comes home could, in theory, stimulate the economy. But there's a problem, which Republican Senator Orrin Hatch hinted at in the Journal piece:

"I'm not against bringing it back this time, but we're going to have to get something back for it," Sen. Orrin Hatch, (R., Utah), the top Republican on the Senate Finance Committee, said Thursday. "It's not right every five years to bring repatriated funds back at a 5% tax rate."

Hatch's concern—that granting tax holidays on a regular basis incentivizes companies to cheat on (or at least artfully avoid paying) their taxes—is one I heard from a lot of Argentine entrepreneurs when I wrote about the country for this month's issue of Inc. Argentina has regularly offered various amnesties and holidays as an incitment to bring tax evaders into the open. But they have the opposite effect:

Bilinkis is a man who takes his responsibility to society seriously, but he admitted to me that when he sold the company, the thought of hiding the proceeds from the sale in a foreign bank account flitted through his mind. Every few years, Argentina's tax authorities, desperate for more revenue, announce a tax amnesty, allowing wealthy individuals who have evaded taxes to report their income and pay as little as 1 percent in tax instead of the standard 35 percent income tax. Bilinkis paid the full rate. "I felt like such an idiot," he says. "I knew at some point there was going to be a tax moratorium."

In other words tax holidays can exacerbate budget problems by effectively rewarding companies for avoiding their taxes. It's, in short, unfair to companies that have paid their taxes, and it might bad long term policy.

Senior contributing writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York. @chafkin