According to the Financial Times, some multinational corporations have been lobbying the Obama administration to undergo a new round of tax repatriation, a process that allows corporations to bring money they hold overseas back to the U.S. at a very low tax rate. The companies are arguing that such a move will boost investment and job creation here at home:
US multinational companies are clamouring for a tax holiday to repatriate billions of dollars “trapped” overseas but are being rebuffed by Barack Obama’s administration…“We do have overseas cash and we would be very supportive of a repatriation holiday,” said Keith Sherin, chief financial officer of General Electric. “If you think about it, there is a lot of cash trapped overseas. If companies could bring that back at more competitive tax rates, I think it would be good for the US economy.“
When corporations bring foreign earnings back to the U.S., they pay the full statutory corporate tax rate, so of course they would jump at the opportunity to pay a lower rate. And a good way to convince policymakers that this is a winning idea is to promise that the money will be used to invest in job creation.
But left out of the story is the fact that we’ve tried this before: it turned into a windfall for shareholders and corporate executives, while not spurring job creation or investment. In 2004, Congress passed the Homeland Investment Act, allowing companies to bring back offshore profits in 2005 and pay a tax rate of just 5.25 percent, far below the 35 percent corporate tax rate.
As the New York Times Floyd Norris wrote, the bill “was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs.” However, according to work done by the National Bureau of Economic Research, 92 percent of the nearly $300 billion that companies brought back went to share buybacks and increased dividend payments. Plus, Kristin Forbes, one of the authors of the NBER study, said that restrictions regarding how repatriated money could be spent “seem to have been completely ineffective”:
“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”
This turned into a tax boondoggle the first time. There’s no reason to give it another chance.