David Kocieniewski
updated 6/20/2011 9:03:30 AM ET
Some of the nation’s largest corporations
have amassed vast profits outside the country
and are pressing Congress and the Obama
administration for a tax break to bring the
money home.
Apple has $12 billion waiting offshore, Google
has $17 billion and Microsoft, $29 billion.
Under the proposal, known as a repatriation
holiday, the federal income tax owed on such
profits returned to the United States would fall
to 5.25 percent for one year, from 35 percent.
In the short term, the measure could generate
tens of billions in tax revenues as companies
transfer money that would otherwise remain
abroad, and it could help ease the huge 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 last Wednesday in
Washington.
“For every billion dollars that we invest, that
have amassed vast profits outside the country
and are pressing Congress and the Obama
administration for a tax break to bring the
money home.
Apple has $12 billion waiting offshore, Google
has $17 billion and Microsoft, $29 billion.
Under the proposal, known as a repatriation
holiday, the federal income tax owed on such
profits returned to the United States would fall
to 5.25 percent for one year, from 35 percent.
In the short term, the measure could generate
tens of billions in tax revenues as companies
transfer money that would otherwise remain
abroad, and it could help ease the huge 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 last Wednesday in
Washington.
“For every billion dollars that we invest, that
creates 15,000 to 20,000 jobs either directly
or indirectly,” Jim Rogers, the chief of Duke
Energy, said at the conference. Duke has $1.3
billion in profits overseas.
But that’s not how it worked last time.
Congress and the Bush administration offered
companies a similar tax incentive, in 2005, in
hopes of spurring domestic hiring and
investment, and 800 took advantage.
Though the tax break lured them into bringing
$312 billion back to the United States, 92
percent of that money was returned to
shareholders in the form of dividends and
stock buybacks, according to a study by the
nonpartisan National Bureau of Economic
Research.
This money comes from overseas operations
and in some cases accounting maneuvers that
shift domestic profits to low-tax countries.
The study concluded that the program “did
not increase domestic investment,
employment or research and development.”
Indeed, 60 percent of the benefits went to just
15 of the largest United States multinational
companies — many of which laid off domestic
workers, closed plants and shifted even more
of their profits and resources abroad in hopes
of cashing in on the next repatriation holiday.
Merck, the pharmaceutical giant based in
or indirectly,” Jim Rogers, the chief of Duke
Energy, said at the conference. Duke has $1.3
billion in profits overseas.
But that’s not how it worked last time.
Congress and the Bush administration offered
companies a similar tax incentive, in 2005, in
hopes of spurring domestic hiring and
investment, and 800 took advantage.
Though the tax break lured them into bringing
$312 billion back to the United States, 92
percent of that money was returned to
shareholders in the form of dividends and
stock buybacks, according to a study by the
nonpartisan National Bureau of Economic
Research.
This money comes from overseas operations
and in some cases accounting maneuvers that
shift domestic profits to low-tax countries.
The study concluded that the program “did
not increase domestic investment,
employment or research and development.”
Indeed, 60 percent of the benefits went to just
15 of the largest United States multinational
companies — many of which laid off domestic
workers, closed plants and shifted even more
of their profits and resources abroad in hopes
of cashing in on the next repatriation holiday.
Merck, the pharmaceutical giant based in
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Companies push for tax break on foreign cash
Corporations say tax break could help revive recovery; but that's not how it worked last time
Corporations say tax break could help revive recovery; but that's not how it worked last time
Whitehouse Station, N.J., was one of those big
winners. The company brought home $15.9 b
illion, second overall to Pfizer’s $37 billion. It
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.,” a Merck 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 three years that
followed.
Merck used the cash infusion to continue
paying dividends and buyingbackstock for the
benefit of shareholders and executives — even
as it was rocked by more than $8 billion in
costs to settle a variety of disputes after
executive missteps. Merck had to pay billions
in back taxes to the I.R.S.; billions more to
consumers suing because of the 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 Jobs
Creation Act, lacked safeguards to ensure the
companies used the money for investment and
job creation in the United States, as Congress
intended. “There were no direct tracing
requirements,” said Jay B. Schwartz, head of
Merck’s international tax unit until 2006. “So
once the money came home, it gave you great
flexibility.”
Finding Work-Arounds
Although the law forbade the use of
repatriated funds directly for executive
compensation or stock buybacks, companies
found plenty of ways around it. “Fungibility is
one of my favorite words,” Mr. Schwartz said.
winners. The company brought home $15.9 b
illion, second overall to Pfizer’s $37 billion. It
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.,” a Merck 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 three years that
followed.
Merck used the cash infusion to continue
paying dividends and buyingbackstock for the
benefit of shareholders and executives — even
as it was rocked by more than $8 billion in
costs to settle a variety of disputes after
executive missteps. Merck had to pay billions
in back taxes to the I.R.S.; billions more to
consumers suing because of the 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 Jobs
Creation Act, lacked safeguards to ensure the
companies used the money for investment and
job creation in the United States, as Congress
intended. “There were no direct tracing
requirements,” said Jay B. Schwartz, head of
Merck’s international tax unit until 2006. “So
once the money came home, it gave you great
flexibility.”
Finding Work-Arounds
Although the law forbade the use of
repatriated funds directly for executive
compensation or stock buybacks, companies
found plenty of ways around it. “Fungibility is
one of my favorite words,” Mr. Schwartz said.
As Congress was debating the tax cut in 2004,
senior executives at Merck anxiously followed
the battle through Congress. Some company
officials were worried that the costs of the
Vioxx lawsuits might top $10 billion and push t
he company to the brink of bankruptcy, Mr.
Schwartz said. When the measure was finally
signed into law by President George W. Bush in
October 2004, “there was a lot of excitement,
a lot of cheering,” among senior management,
he said. Merck executives declined to
comment.
Merck brought back $15.9 billion in October
2005. The next month, it unveiled a
restructuring plan to cut 7,000 jobs. Over the
next three years, about half those cuts were
made in the United States, where the company’
s employment fell to 28,800 jobs, from
31,500.
How big the job cuts would have been without
the tax break is unknown, though Mr.
Schwartz said contingency plans called for
painful reductions throughout the company.
That restructuring was harsh in places like
Albany, Ga., one of the nation’s poorest
communities, where Merck closed its Flint
River manufacturing plant and shed more than
400 workers.
“It was like going through a sudden divorce,”
said Connie McKissack, now 45, who had
worked at the company for a dozen years as a
systems analyst.
While it is impossible to pinpoint where its
repatriated dollars went, Merck devoted much
more money in the next few years to closing
plants and dismissing workers. For the three
years that ended in 2008, those outlays
jumped to $455 million annually, from $107
million in 2004. (Merck officials declined to
senior executives at Merck anxiously followed
the battle through Congress. Some company
officials were worried that the costs of the
Vioxx lawsuits might top $10 billion and push t
he company to the brink of bankruptcy, Mr.
Schwartz said. When the measure was finally
signed into law by President George W. Bush in
October 2004, “there was a lot of excitement,
a lot of cheering,” among senior management,
he said. Merck executives declined to
comment.
Merck brought back $15.9 billion in October
2005. The next month, it unveiled a
restructuring plan to cut 7,000 jobs. Over the
next three years, about half those cuts were
made in the United States, where the company’
s employment fell to 28,800 jobs, from
31,500.
How big the job cuts would have been without
the tax break is unknown, though Mr.
Schwartz said contingency plans called for
painful reductions throughout the company.
That restructuring was harsh in places like
Albany, Ga., one of the nation’s poorest
communities, where Merck closed its Flint
River manufacturing plant and shed more than
400 workers.
“It was like going through a sudden divorce,”
said Connie McKissack, now 45, who had
worked at the company for a dozen years as a
systems analyst.
While it is impossible to pinpoint where its
repatriated dollars went, Merck devoted much
more money in the next few years to closing
plants and dismissing workers. For the three
years that ended in 2008, those outlays
jumped to $455 million annually, from $107
million in 2004. (Merck officials declined to
respond to detailed questions about how the
repatriated money figured into its cash flow.)
Meanwhile, the company accelerated payments
on its debt, kept its dividend steady and
continued to buy back more than a billion
dollars a year in its own stock — cushioning
the blow of immense legal costs to its
shareholders and executives.
Drug companies benefited greatly from the tax
break, but many companies in other industries
did, too. Ford, Pepsi and Honeywell took
advantage. Like Merck and Pfizer, Hewlett-
Packard repatriated money, $14.5 billion, and
soon after it announced it was eliminating
jobs, 14,000.
The WIN America coalition, a multimillion-
dollar campaign underwritten by dozens of
global businesses, counters that many
companies like Cisco Systems, Adobe and
Qualcomm used some of the repatriated
money to hire thousands of workers.
The group says another tax holiday would
bring even more jobs now. Doug Thornell, an
adviser to WIN America, cites a 2008 study
commissioned by the corporations suggesting
that it could spur 450,000 new jobs.
“This is about creating jobs, expanding U.S.
businesses and strengthening American
companies,” said Representative Kevin Brady,
a Republican from Texas, who has introduced
such a bill.
Yet the author of the corporate study, Allen L.
Sinai, has since cooled on the idea. His
research was conducted during the financial
crisis in late 2008. Then, corporations could
not easily raise capital, Mr. Sinai, an economist
at Decision Economics, explained in an
interview last month. They were reluctant to
repatriated money figured into its cash flow.)
Meanwhile, the company accelerated payments
on its debt, kept its dividend steady and
continued to buy back more than a billion
dollars a year in its own stock — cushioning
the blow of immense legal costs to its
shareholders and executives.
Drug companies benefited greatly from the tax
break, but many companies in other industries
did, too. Ford, Pepsi and Honeywell took
advantage. Like Merck and Pfizer, Hewlett-
Packard repatriated money, $14.5 billion, and
soon after it announced it was eliminating
jobs, 14,000.
The WIN America coalition, a multimillion-
dollar campaign underwritten by dozens of
global businesses, counters that many
companies like Cisco Systems, Adobe and
Qualcomm used some of the repatriated
money to hire thousands of workers.
The group says another tax holiday would
bring even more jobs now. Doug Thornell, an
adviser to WIN America, cites a 2008 study
commissioned by the corporations suggesting
that it could spur 450,000 new jobs.
“This is about creating jobs, expanding U.S.
businesses and strengthening American
companies,” said Representative Kevin Brady,
a Republican from Texas, who has introduced
such a bill.
Yet the author of the corporate study, Allen L.
Sinai, has since cooled on the idea. His
research was conducted during the financial
crisis in late 2008. Then, corporations could
not easily raise capital, Mr. Sinai, an economist
at Decision Economics, explained in an
interview last month. They were reluctant to
hire workers or spend in other ways.
Rethinking the Plan
Today, credit is readily available. In fact, many
of those pushing hardest for the break are
sitting on billions in cash in the United States
that they could use to hire if they chose.
The break would make sense, Mr. Sinai now
says, only if Congress carefully restricted the
proceeds to increases in domestic hiring and
investment.
“Many who want this policy try to advocate it
as a jobs-creation program, but that is not
what I found,” he said. “What I found was that
it would shore up the corporate balancesheets
during the depths of the financial crisis and
create some jobs. But the balance sheets are
already so good that I don’t think there’s a
rationale any longer that simply rebuilding the
companies’ finances will lead to hiring.”
Supporters of the measure had also promoted
the tax law as good for investment in plants
and research. An academic study, published in
the National Tax Journal last December, said
companies reported investing as much as $75
billion of the money in equipment and
facilities.
For Merck, it was nearly a wash. In the three
years beginning with the repatriation, the
company increased its spending on research
and development domestically by several
billion dollars, according to regulatory filings.
But its capital spending actually declined in
that time.
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
Rethinking the Plan
Today, credit is readily available. In fact, many
of those pushing hardest for the break are
sitting on billions in cash in the United States
that they could use to hire if they chose.
The break would make sense, Mr. Sinai now
says, only if Congress carefully restricted the
proceeds to increases in domestic hiring and
investment.
“Many who want this policy try to advocate it
as a jobs-creation program, but that is not
what I found,” he said. “What I found was that
it would shore up the corporate balancesheets
during the depths of the financial crisis and
create some jobs. But the balance sheets are
already so good that I don’t think there’s a
rationale any longer that simply rebuilding the
companies’ finances will lead to hiring.”
Supporters of the measure had also promoted
the tax law as good for investment in plants
and research. An academic study, published in
the National Tax Journal last December, said
companies reported investing as much as $75
billion of the money in equipment and
facilities.
For Merck, it was nearly a wash. In the three
years beginning with the repatriation, the
company increased its spending on research
and development domestically by several
billion dollars, according to regulatory filings.
But its capital spending actually declined in
that time.
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 J.
Forbes, a professor of economics at the
Massachusetts Institute of Technology’s Sloan
School of Management who was a member of
President Bush’s council of economic advisers
and who led the study. A Short-Lived Boost
The break did provide the Treasury with a
quick shot in the arm. When Merck brought its
$15.9 billion back, it paid $731 million to the I.R
.S. All told, companies brought back $312
billion in 2005 and paid $16 billion in taxes.
The numbers would presumably be much
bigger now. Technology companies, in
particular, have been holding more profits
abroad. Companies based in the United States
have increased their holdings offshore to
more than $1.5 trillion, meaning the tax break
could generate $50 billion in tax revenue the
first year.
The budget aid could be short-lived, however.
Because companies would be encouraged to
bring back profits 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, the nonpartisan
Congressional office, estimated the program’s
cost at $79 billion in lost revenues over 10
years.
Supporters of the proposal say that estimate is
too high and predict 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. President Obama and Treasury
hiring and employees wages,” said Kristin J.
Forbes, a professor of economics at the
Massachusetts Institute of Technology’s Sloan
School of Management who was a member of
President Bush’s council of economic advisers
and who led the study. A Short-Lived Boost
The break did provide the Treasury with a
quick shot in the arm. When Merck brought its
$15.9 billion back, it paid $731 million to the I.R
.S. All told, companies brought back $312
billion in 2005 and paid $16 billion in taxes.
The numbers would presumably be much
bigger now. Technology companies, in
particular, have been holding more profits
abroad. Companies based in the United States
have increased their holdings offshore to
more than $1.5 trillion, meaning the tax break
could generate $50 billion in tax revenue the
first year.
The budget aid could be short-lived, however.
Because companies would be encouraged to
bring back profits 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, the nonpartisan
Congressional office, estimated the program’s
cost at $79 billion in lost revenues over 10
years.
Supporters of the proposal say that estimate is
too high and predict 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. President Obama and Treasury
Secretary Timothy F. 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.
The prospect of profitable corporations
getting a break as social programs are being
cut has aroused tax protesters and labor
organizations like the Service Employees
International Union, which say it would reward
companies for moving jobs and investment
overseas.
US Uncut, a group that protests corporate tax
avoidance, has criticized Apple for seeking tax
breaks even as it racks up enormous growth
and profits. The group has held dance-ins at
Apple stores, demonstrated outside a
company conference and released a video
spoofing an iPod commercial, declaring “I love
my iPod, but iHate the tax cheat.”
But the break could still be part of a budget
compromise. With the economy languishing,
unemployment high and Congressional
Republicans opposed to additional stimulus,
the idea has gained some unlikely allies,
including some Democrats, the organization
Third Way and the onetime union leader Andy
Stern.
“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 Mr. Stern, the
former president of the S.E.I.U., who suggests
dedicating the tax revenue to an infrastructure
bank that would support public works
projects. “Having it overseas doesn’t help. And
we have to do something.”
This story, "Companies Push for Tax Break on
Foreign Cash," originally appeared in the New
York Times.
will support it only if it is part of a corporate
tax overhaul that results in no decline in
federal revenues.
The prospect of profitable corporations
getting a break as social programs are being
cut has aroused tax protesters and labor
organizations like the Service Employees
International Union, which say it would reward
companies for moving jobs and investment
overseas.
US Uncut, a group that protests corporate tax
avoidance, has criticized Apple for seeking tax
breaks even as it racks up enormous growth
and profits. The group has held dance-ins at
Apple stores, demonstrated outside a
company conference and released a video
spoofing an iPod commercial, declaring “I love
my iPod, but iHate the tax cheat.”
But the break could still be part of a budget
compromise. With the economy languishing,
unemployment high and Congressional
Republicans opposed to additional stimulus,
the idea has gained some unlikely allies,
including some Democrats, the organization
Third Way and the onetime union leader Andy
Stern.
“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 Mr. Stern, the
former president of the S.E.I.U., who suggests
dedicating the tax revenue to an infrastructure
bank that would support public works
projects. “Having it overseas doesn’t help. And
we have to do something.”
This story, "Companies Push for Tax Break on
Foreign Cash," originally appeared in the New
York Times.
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