The two houses of Congress are trying to reconcile tax bills granting corporations tax amnesty for foreign-sourced profits. Most principled people oppose amnesties because they reward past bad behavior and reduce incentives to refrain from future bad behavior. Although many believe that denying amnesty to immigrants is cruel, we at least understand the principles involved. The bad behavior that the corporate tax amnesty would reward is less obvious. Here’s what’s involved.

U.S. law presently allows corporations to defer corporate taxes on their foreign profits until they repatriate these profits by transferring them from their foreign subsidiaries to the United States. Corporations must pay whatever foreign taxes are due, and U.S. law allows companies to credit these foreign taxes against their deferred U.S. tax liabilities. In most countries, the corporate tax rate is less than the U.S. tax rate, thus corporations have net unpaid U.S. tax liabilities.

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Corporations already recognize these deferred tax liabilities on their financial accounts. Accordingly, everyone recognizes that corporations owe these taxes to Uncle Sam. Now Congress proposes to reduce the tax rate on these foreign profits from 35 percent to substantially smaller rates of about 10 percent. The actual rate is now a subject of the reconciliation negotiations. Which rate Congress chooses is not important to this discussion. Both houses have proposed rates that are too low.

To understand the amnesty, you must know, as do all corporate officers and their tax advisors, that Congress granted a similar tax amnesty to corporations in 2004. Since the last tax amnesty, many corporations arranged their accounts to ensure that their profits would appear in their foreign subsidiaries and not at home. They transferred U.S.-sourced profits abroad because corporate tax rates are lower abroad. Congress allows corporations to defer their taxes on foreign profits, and everyone recognizes that Congress might grant another tax amnesty.

How did corporations transfer these profits? They did it through a process called transfer pricing. Corporate subsidiaries routinely buy and sell goods and services among themselves. For example, when a corporation sells a machine in Ireland that it produced in the United States, the U.S. subsidiary that made the machine must sell it to the Irish subsidiary that sold it to a customer. If the corporation sets the price of this sale low, it can transfer profits from the U.S. subsidiary to the Irish subsidiary.

The process also works in reverse. When the Irish subsidiary sells goods or services to the U.S. subsidiary, the corporation can transfer profits from the U.S. subsidiary to the foreign subsidiary by setting a high transfer price. The law requires that transfer prices reflect the true value of transferred goods and services, but as these transfers do not take place in open markets, corporations can set them as they please if they are not grossly unreasonable. The Internal Revenue Service and the Securities and Exchange Commission have not taken many enforcement actions due to lack of budget and will.

If corporations eventually repatriated all their foreign profits, transfer pricing would have no effect on their total corporate tax bills because corporations get credit for foreign taxes paid. But the manipulation of transfer prices is still problematic, as it reduces U.S. corporate tax revenues because it allows foreign governments to collect higher taxes that the corporations deduct from their U.S. tax bills.

Now here’s the kicker. In addition to rewarding bad past behavior, Congress would change the corporate taxation rules so that corporations would pay taxes on only American-sourced profits and not all worldwide profits. This change would greatly increase incentives to use transfer pricing to reduce U.S. future tax liabilities.

Proponents of the tax reform bill argue that the repatriation of profits will encourage corporations to invest more in the United States. But would that it be so? Corporations are flush with cash now. They face no constraints on their investments. They do not invest as much as some commentators might want because many corporations already have adequate plant and equipment to meet future demands for their products.

Corporations will simply distribute the repatriated profits to their shareholders by paying dividends and repurchasing stock. This happened following the last amnesty. Congress needs to undertake serious tax reform, but granting this amnesty and relieving U.S. corporations of their U.S. tax obligations for future foreign-sourced profits is unwise. Like the rest of us, corporations should pay their taxes.

Instead, Congress should require corporations to repatriate their foreign-sourced profits and pay the deferred taxes due which are already on the corporate books. The corporations now have the cash to pay these taxes. Giving them eight years to pay them would be reasonable. The taxes due on $2.6 trillion of unrepatriated profits would go a long way to financing lower tax rates for both individuals and corporations alike.

Lawrence Harris is a professor at the USC Marshall School of Business, a former chief economist of the Securities and Exchange Commission, and executive director of the Financial Economists Roundtable.