Last October, the U.S. Congress passed a tax bill loaded with corporate tax breaks, the so-called Jobs Creation Act of 2004 (Jobs Act). A prime motivation for the provision was the need to end the impasse over the export tax break that had been ruled illegal by the World Trade Organization. In the process, lobbyists pressed for the corporate tax cut bill that they had been waiting for as individual tax breaks were passed in 2001-2003. Congress rewarded them for their wait, passing a number of corporate taxpayer favorable provisions, especially in respect of foreign operations.
U.S. firms pay tax on their worldwide income, subject to a credit for foreign taxes paid on foreign source income. If high taxes in one foreign country can be used to reduce U.S. taxes against U.S. source income, the U.S. has essentially subsidized the foreign country's economy. One way to ensure that doesn't happen is to limit foreign tax credits. For example, a per country limitation would be the surest way to ensure that excess taxes in one country can't be cross-credited against low taxes in another country. The Code before the Jobs Act permitted some cross-crediting, but limited it by requiring income to be categorized in several "baskets" and generally not permitting credits associated with one type of income to be used against income in other baskets. One of the changes in the Jobs Act was to reduce the number of foreign tax credit baskets, thus increasing the permitted cross-crediting of foreign taxes and ultimately reducing the U.S. tax liability of multinational corporations.
While U.S. companies are generally taxed on their worldwide income, there is an exception for U.S. companies that have active business operations overseas. Those companies are permitted to defer U.S. taxes on business profits until they repatriate those profits in the form of dividends. So long as the profits are reinvested in the active business, they are not subject to U.S. tax. If they are repatriated, they are subject to U.S. tax at the corporate rate. (The statutory rate is 35%, but the effective tax rate is 25% or lower for many U.S. corporations.)
The Jobs Act, however, changed the normal operation of the deferral and repatriation provisions for one year. Arguing that repatriation of cash at lower tax rates would help U.S.companies create jobs here at home, supporters of the measure drafted a provision allowing for a one-time repatriation of overseas profits at a very low tax rate of 5.25%.
Opponents of the measure criticized it for rewarding companies that had horded profits abroad to avoid U.S. taxation, while essentially penalizing companies that regularly bring part of their overseas profits back tothe U.S. to invest in their U.S. businesses. Those companies that bring profits back have paid the full amount of U.S. tax due over the years, while the companies that deferred repatriation until the enactment of the Jobs Act incentive will benefit from a substantially lower tax bill on those repatriated profits. As mentioned in the Wall Street Journal article today on the repatriated cash, the lesson for the future is not hard to imagine--more companies will horde their profits overseas, waiting for another special tax break before they bother to repatriate. Timothy Aeppel, Tax Break Brings Billions to U.S., But Impact on Hiring is Unclear, Wall St. J., Oct. 5, 2005, A1.
This is especially true since there is nothing in the Jobs Act that requires companies to create jobs in order to benefit from the low tax rate. In fact, companies can bring the cash back to implement activities already planned prior to the enactment of the break or companies can bring cash back at the same time that they institute cutbacks in their workforces! The repatriated cash can be used for all sorts of activities not directly related to job creation, such as debt repayment or mergers and acquisitions. Furthermore, given the fungibility of money, the repatriated cash can effectively be used to fund stock buybacks and dividends for shareholders, even though those uses are ostensibly not permitted directly.
Has the Jobs Act repatriation cash been used to create jobs in the U.S.? The Wall Street Journal's front page story today (see above) notes that several of the companies that are bringing home large amounts of cash are simultaneously pursuing plans to lay off workers. An example is Colgate-Palmolive, which announced in July that it would repatriate $800 million and announced plans to lay off 4,450 people over the next four years. The Journal also noted that economist Allen Sinai, an advocate of the repatriation proposal, now acknowledges that repatriation will not create as many jobs as he had predicted, though he still suggests repatriations may create as many as 90,000 jobs a year. Others, perhaps more realistically, say we shouldn't expect direct job creation, but should recognize that companies that pay less in taxes have stronger balance sheets and are therefore better competitors that will generally create more jobs in the future than otherwise.
That's not much bang for the repatration tax break buck. The Jobs Act repatriation provision is ultimately just another version of Reagan's "trickle down" economics that lets the good times roll for people at the top with the "trust me" promise that people at the bottom will eventually realize some ancillary benefits. The claim is that the wealthy will generate economic growth that will spill over and eventually lead to more jobs. Yet periods of economic growth in the United States are increasingly marked by heightened inequality, suggesting that the benefits of growth go to people at the top and very little trickles down to people at the bottom.
Other methods of helping people at the bottom to share in the growth might well have a much more dramatic impact and result in better quality of life across the board. Those methods might include revitalized labor laws and minimum wage increases that permit workers who make the profits possible to share in the growth of the enterprise. In the case of the repatriation tax break, the foregone tax revenues could have had beneficial effects on the economy in the hands of the government in terms of filtering out into the broader economy in much the same way claimed for the re-investment of repatriated profits by corporations. For example, those tax revenues could have been used to help fund a new project to contract the rebuilding of the Gulf area out to local Gulf businesses and thus put unemployed and underprivileged Gulf residents and victims of Katrina to work. That would be an example of business working for the good of all Americans.
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