The Transition Tax: Influencing Corporate Spending with One-Time Tax Breaks

Abstract

This article is the first to propose that the goals of the Tax Cuts and Jobs Act, particularly with regard to corporate reinvestment, cannot be achieved without necessary requirements for how repatriated funds are spent in the U.S. This article uses the 2004 tax holiday as an example of a Congressional effort to encourage specific domestic spending through a tax cut. The 2004 tax holiday failed because, among other factors, it did not require multinational corporations to spend repatriated funds on qualified expenditures above and beyond corporations’ levels of pre-tax holiday spending. Ideal requirements for corporations to earn a repatriated income tax deduction would include: an exhaustive list of permissible expenditures, a requirement that spending on permissible expenditures be in excess of pre-tax cut levels of spending, and an enforcement and repayment mechanism for any unearned tax deduction. Parallels can be drawn between the newly enacted transition tax and the 2004 tax holiday. This article discusses the transition tax, and the provisions which end deferral and the worldwide system of taxation without any requirement as to how repatriated funds are spent. The 2004 tax holiday serves as evidence as to how corporations spend repatriated funds following a one-time tax break.