The current system for taxing the income of controlled foreign subsidiaries of U.S. corporations — foreign-source income — makes no sense for U.S. multinational companies or the U.S. Treasury. In theory, foreign-source income is taxed at the standard U.S. corporate tax rate of 35 percent; in practice, Treasury generally receives no taxes on foreign-source income as long as it is held overseas. In fact, U.S. corporations now hold abroad an estimated $1.5 trillion in cash, which the current system encourages them to deploy by acquiring foreign companies and building overseas facilities.

In response, some U.S. multinationals are lobbying for a tax holiday on repatriation of their foreign-source income, similar to the one enacted in 2004. Such a tax holiday would reduce the effective tax rate on those repatriations to 5.25 percent for a limited time period, for example one year. This proposal for another tax holiday is reportedly gathering steam in some circles of liberal Democrats.

Another tax holiday for repatriated foreign profits would be a transition to nowhere. It does not address the fundamental problems of the current tax system. Indeed, it reinforces the incentives for U.S. multinationals to keep their foreign profits in overseas accounts — waiting for the next tax holiday.

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