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A look at tax havens by the Fortune 500

by Kenneth Thomas

A look at tax havens by the Fortune 500

According to a new report today from Citizens for Tax Justice, the 285 members of the Fortune 500 that have parked money overseas would owe an estimated $433 billion in taxes if and when it is repatriated. No wonder these companies are working so hard to get a “repatriation holiday” even though the one given in 2004 did not yield any significant new investment, but lots of dividends and stock buybacks.

The new report list 10 companies with $209 billion parked overseas that report the taxes they would owe on these profits (only 47 do so). These companies all report that they would owe 32-35% on their money, which indicates they have not paid any taxes abroad on it; in other words, the money is in tax havens.

Note that some estimates place these figures even higher; in March, I reported that Apple’s overseas stash was estimated at $64 billion.

Based on the entire 47 companies that report their estimated tax bill, CTJ came up with an average tax rate of just over 27%.

Multiplied by the $1.584 trillion in overseas cash held by the 285 corporations (up from about $1 trillion estimated in March) yields the figure of $433 billion in taxes that would be due if the income were repatriated or the deferral provision for overseas income ended.

What does it all mean? As U.S. companies continue to enjoy record profits, they are declaring them to be foreign profits at a high rate, as we can see in the increase from the March to October estimates. Numerous tech and financial companies have stashed literally tens of billions of dollars, each, in offshore tax havens, which drain billions a year from tax coffers that must be made up with higher taxes on the middle class, larger budget deficits, or cuts in programs. And as we have seen from the two tax returns Mitt Romney has released, there is one tax system for the 1% and another one for the rest of us.

crossposted with Middle Class Political Economist

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Offshored Assets still in IRS cross-hairs but new disclosure program available

by Linda Beale

Offshored Assets still in IRS cross-hairs but new disclosure program available

As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases.

There have been two “voluntary programs” for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty–the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5.

Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.  In addition, of course, participants have to file returns and pay back taxes and interest for the preceding 8 years, and pay any accuracy-related penalties due.

originally published at ataxingmatter

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CRS reports on repatriation tax holiday impact

by Linda Beale

CRS reports on repatriation tax holiday impact

Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c

The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.

Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.

To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.

In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.

originally published at ataxingmatter

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Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

by Linda Beale

Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

The PBS News Hour last night interviewed Senators Levin and Isakson on the jobs bill (video and transcript available here).

Isakson was first off.  He sounded like a right wing sound bite machine: we’re overregulating businesses so we need a “time out” on regulation.  And we need to pass a repatriation tax holiday so businesses can get the money they need to invest and create jobs.

Levin was asked what he thought about that.  He didn’t even comment on the repatriation sound-bite–after all, he has a report just out that investigates the idea of repatriation and concludes it was a losing proposition.   See  Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals, Permanent Committee on Investigations Majority Staff Report, Senate (Oct. 11, 2011) (listing a series of findings showing that repatriation failed to accomplish its goals).**

But Levin did respond to the “it’s regulations and taxes that are killing job creation” GOP mantra.  A recent poll of small business owners showed that small business owners aren’t worried about regulations or taxes.  They just need customers.   So you can help things out by helping small businesses and helping people become customers.

Makes sense, doesn’t it?  It’s certainly an argument made here on ataxingmatter many times: the way to create customers is to stop the collapse of the American middle class with programs like infrastructure projects.

Woodruff then asked Isakson what he had to say to that.  His response–yeah, well, the vote we have tonight is the pay-for–a surtax on millionaires.  And there are 392,000 small businesses that a surtax on millionaires is going to hurt.

So now Woodruff asks Levin what about this argument that the surtax is gonna hurt small businesses.

Levin set the facts straight on his colleague’s claim that a surtax on millionaires would hurt all those small businesses.  He said quite clearly that the facts show that only a very small percentage of small business owners earn the million that would put them in the group subject to the surtax.  So the issue is taxing millionaires, whose share of the income has skyrocketed in the last few years compared to the middle class, which has stagnated.  The surtax would mainly hit the overpaid CEOs of big corporations, etc.

Funny, Judy Woodruff (an undergraduate classmate of mine back at Duke, by the way) didn’t blink an eye.  You’d think the next question to Isakson would be–given the fact that only a tiny proportion of small businesses would be subject to the millionaire surtax, Senator, a fact that has been pointed out numerous times, why do you insist on claiming that it would hurt all small businesses.  But she didn’t.  The PBS station is worried about appearing “balanced” and that means you can’t call a fact a fact and point out that a presenter is stating something that isn’t supported in the facts.  You let an interviewee do it, if they can get it in, but you let the other side get by with continuing to repeat its fact-less sound bites.

So Senator Isakson’s response was:

[Senator Levin’s] response to that question just proves this is all about political messaging and really doesn’t have anything to do with purpose, because if they really cared about small business, they would exempt limited liability corporations, S-corporations and sole proprietorships from the application of this tax. Then they’d only be taxing millionaires. But they’re going after small business as well.\

Now, folks, that’s a ridiculous response.  (Woodruff didn’t say that, but I will.)  It’s ridiculous because Levin gave the facts–small businesses don’t complain about regulations, most small businesses don’t make millions and wouldn’t be subject to the surtax.  And Isakson had the gall to call that factual response “political messaging” , even while Isakson continued with his GOP soundbite political message campaign of implying that small businesses need to be protected from the millionaires surtax!

Note also that Isakson suggested that tif there had to be a surtax, it should exempt LLCs, S corporations and sole proprietorships.  He offered no justification whatsoever for that terribly broad exemption (other than the proffered “it’ll hurt small businesses that Levin already soundly defeated).  If you’re making millions from your business, you are successful enough to pay the tax.  If you are not, you won’t have to pay the tax.  If you exempt LLCs (mostly operated as partnerships) and S corporations and sole proprietorships, you are exempting a lot more than small businesses!  Those include hedge and private equity funds (some managers of which make hundreds of millions a year), real estate partnerships, huge businesses operating as sole proprietorships, and  people like John Edwards who make millions through their S corporations etc. etc. etc.  If you couple that with the zero taxation on capital gains that most on the right are pushing for, that’d likely mean that the CEOs of multinational corporations would be the ONLY millionaires and gazillionaires that the tax would hit!

But did Judy follow up along those lines?  Nope.  Instead she asked Isakson whether the country doesn’t need stimulus rather than cutting at this fragile time for the economy.

His response was to deliver the right wing political message yet again:

1.  the right’s response to the fact that the last stimulus made a huge difference–a claim that it didn’t solve tthe problem permanently (with the implication that we might as well not have done it).  Says Isakson (paraphrasing):  Last bill paid teachers, but once the bill is gone, there’s no money to pay them.  (Implication–the stimulus was useless.  I doubt that the teachers whose jobs were saved for a few years would agree or the students who were saved from overcrowded classrooms or the lack of a music program.)

2.  the right’s response to the need to enact a stimulus rather than cutting–we’ve got a debt problem and a debt crisis.   Isakson says “we’re at the breaking point on leverage” so he wants to “inspire the private sector to reinvest in our country and reinvest in businesses.”   (of course, this overlooks the fact that the “debt crisis” was caused by right-wing obstructionism. or that the US Treasury can borrow now at the cheapest rate we can expect to see forever once this crisis ends–we should borrow cheap while we can, spend it on infrastructure and job creation.  It also roundly ignores the historic pattern that businesses won’t invest in US business when (a) we allow them to expatriate assets to create businesses abroad without taxing them on the built in gains in those assets, (b) we allow them to fire workers with ease because we’ve so weakened our labor laws that workers find it almost impossible to form unions and have any negotiating power with their bosses and (c) we continue to give businesses tax breaks for mergers and consolidations that create multinational super businesses that have no loyalty to the country  (Jeff Immelt said as much in the previous night’s NewsHour broadcast).

_______

**The report lists the findings as follows:

1. U.S. Jobs Lost Rather Than Gained; 2. Research and Development Expenditures Did Not Accelerate;  3. Stock Repurchases Increased After Repatriation; 4. Executive Compensation Increased After Repatriation; 5. Only A Narrow Sector of Multinationals Benefited; 6. Most Repatriated Funds Flowed from Tax Havens; 7. Offshore Funds Increased After 2004 Repatriation; 8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations ; 9. Repatriation is a Failed Tax Policy

originally published at ataxingmatter

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Repatriation Tax Holiday–WIN America is pushing hard…

by Linda Beale

Repatriation Tax Holiday–WIN America is pushing hard…

I get a press release a day from WIN America, the coalition of almost two dozen multinationals and about two dozen business organizations (like the Chamber of Commerce) that is pushing for another big “repatriation holiday” tax cut for the multinationals.

Now they’re touting the Hagan-McCain Foreign Earnings Reinvestment Act with lots of quotes from those that are on board .

Most are unsurprising members of the right-leaning arm of the GOP.

  • Douglas Holtz-Eakin wants “private-sector driven initiatives” and claims repatriation represents “a welcome step in the right direction” by meeting “near-term needs for more jobs and …long-term creation of a competitive tax code.”

Nah.  A repatriation holiday, in the first place, isn’t a “private-sector” initiative.  It is government policy acting to single out multinationals for a special tax break compared to the current rules.  That is as much a public as a private action.  And nothing about the tax holiday is likely to lead to much “near-term” job creation–maybe a few, but at a steep price.  And it certainly hasn’t got anything to do with reasonable changes to the tax code.  It isn’t clear, to start with, that “competitive tax code” is a goal we should be striving for.  Who are we helping compete with whom, if we design our tax code for “competitiveness” rather than for fair taxation?  Note that the demand for government to create a “competitive tax code” is essentially a demand that government intervene to establish special market rules for multinationals that will work in their favor (letting them have more money)…..

Holtz-Eakin, by the way, was paid by the U.S. Chamber of Commerce to write a report on the repatriation tax holiday.

  • Eric Cantor claims “American companies currently pay one of the highest tax rates in the world” and that repatriation “will spur investment, economic growth, and job creation”.

On the first, the answer is clearly no.  US companies have slightly higher than average statutory federal income tax rate, but they don’t pay that tax rate on their economic income.  The majority don’t pay any federal income tax most of the time.  Those that do may pay at an effective tax rate of around 20-25%, but even that is likely an overstatement because of the way they can manipulate income.  We don’t have a VAT here, as most European countries do.  There are just about as many state loopholes as federal tax loopholes.  etc……

On the second, the assessment is clearly no.  The last (supposedly ONLY) repatriation holiday in 2004 was an expensive bust, costing the fisc more than 60 billion and mostly going to share buybacks that merely changed shareholders’ investment portfolios.

  • Kevin Brady says repatriation will allow US multinationals to “invest in jobs and expand their businesses in our backyard.”

Again, this is the same argument that was made for the failed 2004 repatriation effort.  It is even weaker this time around, because companies have even more cash.  They can already do whatever investing they really want to do in their U.S. business.  A repatriation provision without any teeth (to require proof of new US jobs that wouldn’t have been created without it–taking into account, that is, the fungibility of money– and to clawback the tax benefit without the proof) is just another corporatist giveaway.

  • Grover Norquist (the “no new taxes ever no matter what” president of Americans for Ending Earned Benefits–oops, Americans for Tax Reform) says that “Repatriation is simply too good of an idea not to do” because the 2004 deal brought back billions “from locked up overseas accounts” and it can be accomplished “without Congress spending a dime” so “[t]here is literally no downside to doing this.”

Wrong, wrong, and wrong.  First, as noted repeatedly, there is miniscule good in the repatriation idea.  A much better job creator would be to dedicate the $80 billion from repatriated fund taxes over the next ten years to direct jobs programs (like the New Deals CCC, etc.) building infrastructure.   Second, repatriated funds aren’t “locked out” overseas–they may be sitting in U.S. bank accounts in the foreign affiliate’s name, or sitting in U.S. investments in the foreign affiliate’s name.  And even if they aren’t actually already in the US (so “bringing them home” wouldn’t add a penny more to the cash awash in the country), the parent can bring them home already at very low tax cost–the $80 billion over ten years shows that there isn’t a huge tax cost to repatriating funds.  That’s because multinationals get a foreign tax credit, and the Bush tax cuts included a host of provisions that were corporate-friendly, including modifications to the way the credit works to make it much easier to use credits against US income.  Further, even if these cash-rich US multinationals need a little more money for a planned investment, they can borrow against their assets now at exceptionally low rates.  Third, a tax holiday is not a freebie that doesn’t cost the fisc.  Grover Norquist of course knows all about tax expenditures, but he also knows that most Americans don’t.  This is PR and nothing else.  That $80 billion would either fund needed programs (see above) or help the US avoid an additional $80 billion deficit.  And that’s really important, since the rightwingers are intent on using every deficit dollar to support their goal of decimating the earned benefits programs established in the New Deal.

But there are several on the “quotes” list that are disappointing, at least.

  • Simon Rosenberg, Founder of the New Democrat Network, says “The Foreign Earnings Reinvestment Act is smart public policy…[that will help bring hundreds of billions back home, to be invested in the United States.”

There’s nothing progressive about a corporatist provision that puts money in the hands of the biggest multinationals that have most easily used gimmicks with the intended purpose of offshoring profits to avoid U.S. tax.  (Unfamiliar readers might look at prior posts about repatriation and the transfer pricing gimmick on intangible intellectual property ‘sales’ to foreign affiliates.)  As noted, this extra money from avoided taxes is most likely not to be used to create jobs (they can do that already if they want to) but to be paid out in bonuses for improved performance to already excessively overpaid managers and in share buybacks to (mostly wealthy) shareholders with the primary result of portfolio diversification that may in fact lead to more investment of those dollars offshore in emerging markets.

Rosenberg claims to espouse “new progressive” ideas.  But folks, there isn’t anything progressive about a repatriation holiday–it’s just more favors for Big Money.

  • Barbara Boxer says bringing back a trillion dollars “that’s sitting overseas” will “create jobs, strengthen the economy, and reduce the deficit.”

Not likely.  If a company already has plenty of money to invest and can borrow against its foreign cash extraordinarily cheaply and sees an opportunity to expand its business by investing, it will invest.  You don’t need the tax holiday to do it.

Boxer, by the way, is bound to be under pressure from her Silicon Valley constituency- all those big IT companies that find it easiest to “transfer” their intellectual property to foreigners and then avoid US taxes, and who have great stores of funds overseas that would benefit from the repatriation tax holiday.

 

originally posted at ataxingmatter

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Repatriation Holiday Lobbying–Money Speaks…

by Linda Beale

Repatriation Holiday Lobbying–Money Speaks…

We’ve discussed repatriation before–the tax break being pushed by multinationals who want to bring some of their offshore profits home without paying taxes, as they did in the 2004 “one time only” repatriation break.

The reason they have so much money offshore is that they use gimmicks–such as transfers of intellectual property rights to offshore subsidiaries in low-tax jurisidctions.  These are pseudo transfers (to affiliates) of property they would NEVER really sell out of their companies to independent third parties.  Having the affiliate “own” the right means that the profits associated with the innovation carried out in the US go to the offshore company and aren’t subject to US tax until they’re officially treated as being transferred back to the parent.  “Selling” the IP to the affiliate is done solely to defer/avoid US taxes on those profits.  Of course, the transfer pricing for the intellectual property is gimmicky too–since no company would sell its main moneymaker, the idea of a comparable market price is foolish to start with.  So most of those profits should have been treated as US profits all along–and subject to tax.

A repatriation holiday would just mean more money in the pockets of the uberrich–the managers and some of the owners.   It’s just another corporatist tax giveaway that pushes upward redistribution that moves us even more resolutely towards oligarchy.  It won’t create jobs–companies already have plenty of cash to invest in this country if they thought they had customers to make money from.
But the companies probably have a pretty good chance of getting the break, even though it is a stupid waste that adds to the inequality problem and does nothing for creating jobs.  Why?
Read after the jump!
First, because some of the wealthiest and most powerful companies want it. And these days, what powerful companies want, Congress tends to be willing to give.  Google, Apple, Cisco, Oracal, and many other companies that depend on their outsourced IP are hoping they can avoid even the little bit of tax that they’ve paid in the past.

Second, because those companies have hired as lobbyists people who were very recently staffers to members of Congress who will be writing the law.  The most notorious of these is Max Baucus’s former Chief of Staff, Jeffrey Forbes. See Rubin & Drucker, Google Joins Apple in Push for Tax Holiday, Bloomberg.com, Sept. 29, 2011.  The piece notes that Forbes is part of an army of more than 160 lobbyists, 60 of which are former congressional staffers, who are pushing for the repatriation holiday.  And those aren’t really all the lobbyists–they are just the “registered” lobbyists–i.e., the proverbial ‘tip of the iceberg’.  Then there’s the WINAmerica coalition and the firm working with it.  This army of lobbyists is out to rape the country, and the same congresspeople who moan and lament about deficits are likely going to give the multinationals an $80 billion (over ten years) tax break just cause their buddies ask them nicely for it.

Even though we have proof that repatriation doesn’t create jobs–the 2004 tax holiday resulted in thousands of jobs LOST as companies fired workers even while repatriation millions–Congress is still contemplating another one.  Why?  The article notes that one thing that is being touted as an advantage is ‘flooding the US with cash.’   Doubtful.  Much of that cash may already be sitting in US banks even though not repatriated through the company.  And what is actually brought over and then paid out to managers (in even bigger outsized bonuses) and shareholders (in buybacks or dividends) is perhaps more likely to be invested in Asian markets than it is to stay in the US.  Or it will be just more fodder for the rich managers and shareholders to use to buy shares in the secondary markets from their rich peers, that top crowd that owns most of the financial assets.  Lot of good that will do the carpentars and drill press operators and other ordinary workers.

One of Boehner’s aides says that former staffers don’t make policy.  Balderdash.  Those staffers are hired to lobby because they have access and they know their former colleagues.  They have access that ordinary Americans don’t have.  They are pushing for legislative action on behalf of corporate giants.  None of them likely gives a damn that the policies they are pushing for don’t make economic sense at all for ordinary Americans.  Why should they care?  They are lobbyists in it for their own financial rewards from “selling” an idea to their former colleagues that will benefit their current bosses.

Martin Sullivan has it right, as quoted in the Bloomberg article:
The proposed holiday would reward the companies that have most aggressively parked profits in tax havens such as Bermuda, the Cayman Islands and Switzerland, said Martin A. Sullivan, a former Treasury Department economist and contributing editor for the non-partisan Tax Notes.
“A lot of what companies report as foreign profit is really U.S. profit that should be subject to U.S. tax,” Sullivan said. “Those earnings didn’t get overseas by accident. Many of these companies intentionally put them there to avoid paying U.S. taxes.”

Originally published at ataxingmatter

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Watch What I Do…..

This is my first official posting on Angry Bear. Let me start with a “thanks and delighted to be here.” I look forward to a productive interchange and expansion of the work I have been doing through ataxingmatter, my blog on tax and economic issues. I will continue to maintain the tax blog, and post here about once a week (usually with simultaneous posting on ataxingmatter).

There has been quite a bit said about Obama’s proposals for international taxation. If you read ataxingmatter, you know that I think the proposals to tighten up the way the rules work to prevent abuses are important starts in the right direction. Not surprisingly, multinational corporations have suggested that any change to the international regime that increases their taxes will make them even less competitive internationally (implying that they already have too little money to compete well) and ultimately, even quickly, lead to the demise of U.S. jobs. See, e.g., Donmoyer, Ballmer Says Tax Would Move Microsoft Jobs Offshore, Bloomberg.com, June 3, 2009.

One would think from such talk that US multinationals are just hanging on by the sheerest strings, unable to reduce costs further, leaving very small profits (if any) for their shareholders, and barely managing to pay their managers enough to keep decent talent aboard. But is that what Ballmer really means? Isn’t it more likely that it is a question of Microsoft hoping to retain all that money for its managers and owners rather than see a penny of it go to government purposes (like education, basic research)? How do we get any idea about what differences taxes make to companies when what managers say can’t really be trusted to shed much light on actual plans for the future?

Well, there is some real data on this issue that comes from the 2004 tax legislation–the corporate pay-back bill that was sold to the public with the same old claim that tax cuts would create millions of new jobs. The 2001-2003 tax bills cut revenues, but primarily lowered tax liabilities for individual taxpayers. (As I recall, Bush himself saw about a $37,000 tax cut from the 2001 legislation and Cheney more than double that.) Corporate lobbyists had agreed to this plan–ram the individual tax cuts through first and then pass a big bill fulfilling the multinationals’ wish list. The Bush administration and Congress came through in blazing colors for the corporate lobbyists, passing a host of corporate-friendly provisions under the guise of “job creation tax incentives for manufacturers, small businesses, and farmers.” (That’s the heading for Title II of the so-called American Jobs Creation Act of 2004. Even the names of the various bills ultimately passed in 2004 represent a veritable smorgasbord of propaganda–the “Homeland Investment Act”, the “American Jobs Creation Act”, and, the same year, the “Working Families Tax Relief Act”. )

The Jobs Act provisions included a host of bad policy choices all in the name of freeing up investment cash so that corporations could invest more in the good ol’ USA: even more section 179 expensing; even more accelerated depreciation for leaseholds, restaurants, aircraft, and syndication property; S corporation expansion; AMT breaks; more cross-crediting of foreign tax credits; more tax expenditures for the Big Oil, Big Timber and Big Pharm. And there was one other tax expenditure that was heavily lobbied for on behalf of multinational enterprises–a (purportedly one-time) provision for very low taxed repatriation of foreign earnings, in new section 965 of the Code. The MNEs claimed that the break would permit them to create thousands of new US jobs by reinvesting tax savings in their US businesses–investments that just couldn’t be managed under the constraints on the current tax burdens on repatriated cash. Repatriation, on the other hand, was supposed to lead to an increase in capital spending in the range of 2-3% over two years (see NBER paper, below, noting J.P. Morgan Securities’ estimate) and firms stated both confidentially and publicly that they planned to use repatriated funds for business purposes like acquisitions, capital spending, R&D, debt repayments rather than to pay out profits to shareholders.

The express purpose of the repatriation tax cut was to increase investment and viability of U.S. operations. Hiring new employees, conducting R&D, increasing capital investment in the US were all good uses, and Treasury guidelines indicated that use to pay executive compensation, dividends or stock redemptions would disqualify the repatriations from the tax benefit.

Did the corporate giants deliver? An NBER working paper by Dhammika Dharmapala, Fritz Foley and Kristin Forbes concludes that they did not. Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, NBER Working Paper No. 15023, June 2009. Here’s the conclusion, as stated in the abstract.

Repatriations did not lead to an increase in domestic investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.

Furthermore, money is fungible. The paper concludes that firms “were able to reallocate funds internally to bypass the publicly stated goals of the Act.” Id. at 5. So of the $299 billion that companies brought back from foreign subsidiaries (about 5 times the normally repatriated amount), about 92 percent of it went to shareholders in share buybacks and increased dividends. And interestingly, the firms that brought back the most money under the repatriation scheme were the firms that tended to “shield[] foreign income from U.S. taxation by using tax haven affiliates or holding companies.” The study also found that “[f]irms that increased parent equity provisions around the time of the tax holiday … had significantly higher levels of repatriations. This pattern suggests that the domestic operations of U.S. MNEs were not capital constrained and were instead providing liquidity to affiliates. These firms seem to have taken advantage of the HIA by ’roundtripping,’ that is, by replacing retained earnings that would be subject to high repatriation taxes if there were no tax holiday with new paid-in capital.” In fact, the paper includes a comparison of MNE and nonmultinationals on financial constraint indicators, showing that the MNEs are less constrained than nonmultinationals under each of the three important indicators.

At least one result was that good guys–the MNEs that didn’t use as many tax shelters to shield their foreign income and who regularly repatriated it and paid taxes on it–didn’t get nearly as much benefit from this bill as the bad guys–the MNEs that shielded their foreign income as much as they could and held it abroad until they could get this repatriation measure passed through their intensive lobbying pressure. And the bad guys didn’t do much of anything in the way of job creation, the political calling card they used to get their special tax break passed.

Seems to me we ought to at least keep this Jobs Act history in mind in the discussion of President Obama’s efforts to tighten international taxation rules and the already begun whining by MNEs that they are having such a difficult time competing that any further taxation will force them to move out of the US completely.

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