How the 2004 tax holiday failed the US

US flag on New York Stock ExchangeAs US corporations push for a 'repatriation tax holiday', US fiscal think-tank the Center on Budget and Policy Priorities (CBPP) has produced evidence showing last time this was done "its primary effect was to provide a huge windfall to the shareholders of a small number of very large corporations".
As we reported last week, big US corporations such as Apple, Google, Pfizer and Kodak have come together in the 'Win America' campaign are backing calls for a tax break which they claim will allow firms to "bring up to $1 trillion in global earnings back home to invest".

Corporate tax rate

But the CBPP report has looked closely at what happened in 2004 when Congress implemented a one-time "dividend repatriation tax holiday" which allowed firms to bring profits they had parked overseas back home at a tax rate of just 3.7% rather than the normal corporate rate of 35%.

The corporate lobby pushed that measure, claiming it would boost the economy and create jobs. What actually happened was that firms used the repatriated money to repurchase their own stock and pay dividends to shareholders. And a study by the National Bureau of Economic Research found the move "did not increase domestic investment, employment or R&D".

Here's what some of the US companies who benefitted from the 2004 tax break did.
  • Pfizer, which repatriated $37bn, closed factories and cut 10,000 US jobs in 2005.
  • Ford, which repatriated $850m, laid off more than 30,000 workers in 2005 and 2006.
  • Honeywell brought home $2.7bn before axing 2,000 jobs in 2005 and 2006.
  • Merck repatriated $15.9bn and laid off 7,000 workers in 2005.
All those lay-offs came at a time when the US economy was growing. The US Treasury department confirms that many of the largest beneficiaries of the tax holiday cut jobs, despite the fact that across the economy as a whole, new jobs were being created.

Cisco Systems

Cisco Systems is one of the firms in the Win America coalition. In 2004, it used the tax holiday to repatriate $1.2bn at the temporary low tax rate. Since then, the amount of profits the company permanently invests overseas has increased by $24.8bn.

Last October, Cisco CEO John Chambers complained that "U.S. companies can't spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability". One month before, Cisco announced the first dividend in its history.

Chambers also told analysts that the size of the dividend payment would depend partly on whether another tax holiday was announced. And in November, Cisco announced it was adding $10bn to a $72bn stock repurchase programme. Other firms in the coalition are doing similar.
  • Pfizer has announced a $5bn share repurchase programme.
  • Microsoft has upped its quarterly dividend by 23%.
  • Adobe is to repurchase $1.6bn in stock.
  • Qualcomm upped its quarterly dividend by 12% and announced a $3bn stock repurchase programme.
The report concludes that "Providing large multinational corporations with a large tax cut via a repatriation tax holiday is not likely to generate the promised investments or jobs in the United States." And it says a new tax holiday would encourage firms to move more funds overseas in anticipation of yet another break.

It recommends "ending or limiting the feature of the tax code that created this disincentive in the first place: the ability to indefinitely defer payment of U.S. corporate income taxes on overseas profits".

It says such a step "would have the same practical effect as the tax holiday while raising - rather than losing - significant new tax revenue helping to preserve the corporate tax, and eliminating a major incentive for firms to shift jobs and profits overseas. The full report is available below.

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