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Originally published June 19, 2011 at 10:05 PM | Page modified June 20, 2011 at 10:49 AM

Companies push tax cut on overseas profits

Some of the nation's largest corporations have amassed vast profits overseas and are pressing Congress and the Obama administration for a tax break to bring the money home. But critics say the last time that was done, the promised economic benefits failed to materialize.

The New York Times

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Some of the nation's largest corporations have amassed vast profits overseas and are pressing Congress and the Obama administration for a tax break to bring the money home.

Apple has $12 billion offshore, Google has $17 billion and Microsoft has $29 billion.

Under the proposal, known as a repatriation holiday, federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. The measure could generate tens of billions in short-term tax revenues, and it could help ease the huge federal budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as "the next stimulus" at a conference Wednesday in Washington, D.C.

"For every $1 billion that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly," said Jim Rogers, chief executive of Duke Energy, which has $1.3 billion in profits held overseas that it could bring back.

But that's not how it worked last time.

Congress and the Bush administration gave companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment.

Investors big winners

While the tax break lured 800 companies into bringing $312 billion back to the United States, 92 percent of that was used for dividends and stock buybacks, according to the nonpartisan National Bureau of Economic Research. The study concluded the program "did not increase domestic investment, employment or research and development."

Indeed, 60 percent of the benefits went to 15 of the largest U.S. multinational companies — many of which laid off domestic workers, closed plants and shifted even more profits and resources abroad in hopes of cashing in on the next repatriation holiday.

Merck was one of those big winners. The pharmaceutical giant brought home $15.9 billion, second overall to Pfizer's $37 billion. Merck used the money for "U.S.-based research and development spending, capital investments in U.S. plants, and salaries and wages for the U.S.," spokesman Steven Campanini said last week.

According to regulatory filings, though, the company cut its work force and capital spending in this country in the next three years.

Instead, Merck used the cash infusion to continue paying dividends and buying back stock for the benefit of shareholders and executives — even as the company was paying billions in back taxes to the IRS; billions more to consumers because of dangerous side effects of the painkiller Vioxx, and hundreds of millions to the Justice Department, which had accused the company of defrauding Medicare.

The tax break, part of the American Job Creation Act, was completely lacking in benchmarks that companies had to meet to keep the tax benefit. "There were no direct tracing requirements," said Jay Schwartz, head of Merck's international tax department until 2006.

The law forbade the use of repatriated funds directly for executive compensation or stock buybacks, but companies found plenty of ways around it. "Fungibility is one of my favorite words," Schwartz said.

Closures, layoffs

Merck devoted much more money in the next few years to closing plants and dismissing workers. Those outlays jumped to $455 million annually for the three years ending in 2008, from $107 million in 2004. (Merck officials declined to discuss how the repatriated money figured into its cash flow.)

The company also accelerated payments on its debt, kept its dividend steady and continued to buy back more than $1 billion a year in stock — cushioning the blow of immense legal costs to shareholders and executives.

Many companies in other industries benefited, too. Ford, Pepsi and Honeywell took advantage of it. Hewlett-Packard repatriated $14.5 billion and soon announced it was eliminating jobs, 14,000.

Much the same happened elsewhere, according to a review of taxpayer data by the National Bureau of Economic Research. "For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages," said Kristin Forbes, a professor of economics at the Massachusetts Institute of Technology's Sloan School of Management who was a member of President George W. Bush's council of economic advisers and who led the study.

The WIN America coalition, a multimillion-dollar campaign underwritten by dozens of global businesses, counters that many companies such as Cisco, Adobe and Qualcomm used repatriated money to hire thousands of workers. Doug Thornell, an adviser to the group, cites a 2008 study commissioned by the corporations suggesting another tax holiday could create 450,000 jobs.

"This is about creating jobs, expanding U.S. businesses and strengthening American companies," said Rep. Kevin Brady, R-Texas, who introduced such a measure this spring.

Yet, the author of the corporate study, economist Allen Sinai, has cooled on the idea. His research was conducted during the financial crisis in late 2008, when companies could not raise capital easily. Credit is readily available today, and many companies pushing hardest for the break already are sitting on billions of cash that they could use to hire if they chose.

A repatriation holiday would only make sense, Sinai now says, if Congress carefully restricted proceeds to increases in domestic hiring and investment.

Short-term benefit

The earlier tax break did provide the Treasury with a quick shot in the arm. Companies brought back $312 billion in 2005 and paid $16 billion in taxes.

The numbers presumably would be much bigger now. U.S.-based companies have increased offshore holdings to more than $1.5 trillion, meaning a tax break now could generate $50 billion in tax revenue the first year.

However, because the holiday would encourage companies to bring profits back in one year, tax revenues would be smaller in future years. Furthermore, companies might park future profits offshore in hopes of another holiday. The Joint Committee on Taxation, a nonpartisan congressional office, estimated the program's cost at $79 billion in lost revenues over 10 years.

Supporters of the proposal counter that the repatriation holiday would pay for itself by encouraging hiring and other economic activity. Others say it is a reasonable price for economic aid from the private sector.

The Obama administration has been uncharacteristically harsh in its criticism of the idea. The president and Treasury Secretary Timothy Geithner have said they will support it only if it is part of a corporate tax overhaul that results in no decline in federal revenues.

Still, with the economy languishing, unemployment high and congressional Republicans opposed to additional stimulus, the idea has gained unlikely allies, including some Democrats, the organization Third Way and Andy Stern, one-time president of the Service Employees International Union.

"Even if it costs the government $80 billion in the long haul, it would be worth it to try to put people to work now," said Stern, who suggests dedicating the tax revenue to an infrastructure bank to support public-works projects. "Having it overseas doesn't help. And we have to do something."

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