Another Tax Holiday for Corporations Is Gaining Traction

Capitalizing on the government’s need for money and 9% unemployment, U.S. corporations and their lobbyists are pressuring Congress for another deep discount deal to induce them to bring home the estimated $1 trillion in profits waiting offshore. The money is stranded there by this country’s 35% corporate tax rate, the highest of any country of size other than Japan.

Instead, how about 5.25%? That’s the breathtaking discount the corporations propose.

Cisco’s CEO John Chambers, in an op-ed piece in the Wall Street Journal last October, thought that the money could create 2 million jobs, but the opening position of a group of companies arguing for the tax holiday is that there can be no conditions restricting how the money is used.

Which brings us to the American Jobs Creation Act, signed by George W. Bush in October 2004, and which declared just such a tax holiday that the multinationals now want repeated. How did that play out?

That bill forbade the money be used for executive compensation, or dividends or stock buybacks. Corporations paid that no attention, did exactly that and, money being fungible, simply claimed that different money stashes had been used.

As for jobs, the purpose of the bill in 2004’s anemic job market:

Merck repatriated $15.9 billion in October 2005 and in the following month announced a plan to close plants and reduce its workforce by 7,000 jobs.

Pfizer eliminated 7,000 jobs in 2006 and announced another 10,000 in the following year.

Dell dangled a promise to build a $100 million plant in North Carolina, but later admitted it intended to build the facility anyway and spent $2 billion in a share buyback.

Instead of job creation, a study by the nonpartisan Bureau of Economic Research found that, of the $312 billion that flowed back to the U.S. under the Bush amnesty, 92% of the repatriated money went to shareholders (top management of companies are usually major shareholders) in the form of dividends or purchases of the companies’ own stock. By spreading the value of a company on fewer shares, a stock buyback increases the value of each share still outstanding. The program “did not increase domestic investment, employment or research and development.”

There are many arguments against declaring yet another tax holiday, beginning with rewarding corporations for moving millions of American jobs overseas which, to an extent, generated those profits. The claim that it would create jobs is even more dishonest that in 2004. Corporations are sitting on a $2 trillion cash hoard in the U.S. according to the Federal Reserve. They do not need overseas cash to create jobs. The principal driver of expanded demand for goods and services is what is lacking.

A bigger negative is that the 2004 program induced corporations to use accounting legerdemain to move still more profits overseas, thus reducing taxes here at home, in the hope that they would persuade Congress to declare a tax holiday once again, just as they are lobbying for now.

The real issue is the need for reform of corporate taxes. Few large corporations actually pay the 35% rate, but the high rate drives corporations to countries that offer much lower rates or no taxes at all, and to create enormous tax departments (975 on staff at General Electric per this New York Times exposé in March) to seek convoluted ways to circumvent the tax code.

Will this encore repatriation go forward? Corporations easily persuade Congress to do their bidding, but where does President Obama stand? He has spoken repeatedly of corporate tax reform – in all three State of the Union addresses! – yet he has done nothing.

(The message has changed from “ending the tax breaks for corporations that ship our jobs overseas” in 2009 to “simplify the system, get rid of the loopholes, level the playing field, and use the savings to lower the corporate tax rate for the first time in 25 years without adding to our deficit” in 2011).

The danger is that, having done nothing, having taken no initiative, Obama will cave in to another dreadful Congressional program that comes to his desk. He should block any amnesty plan for overseas profits that is not linked to overall corporate tax reform — reform that should consider wholly different ways to tax, a subject to be taken up separately here.

This time, the terms of any overseas profit repatriation that is appended to reform should set a higher rate than the ludicrous 5.25% and ban corporations from either increasing their dividend or buying back any stock for a period of a few years. The statutory penalty for violation? Forfeiture of the special rate and payment of the full 35%.