Sunday, June 07, 2009
Five years ago the federal government gave American corporations a one-time tax holiday on profits made overseas so that they would invest the savings in the U.S. operations and create new jobs. A new study has found, however, that few companies used the 2004 Homeland Investment Act the way Congress intended, and instead gave most of the tax break to shareholders.
According to the report (Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act) by the National Bureau of Economic Research, corporations brought home $300 billion in overseas profits in 2005, paying a tax rate of only 5.25% on the earnings instead of the usual 35%. Researchers calculated that 92% of this money was essentially given to shareholders through share buybacks and increased dividends.
For instance, Dell Computer—one of the biggest proponents of the Homeland Investment Act—brought home $4 billion in profits from its international operations and spent half of it on share buybacks. Dell did spend $100 million on a new plant in Winston-Salem, NC, but researchers say the company would have built it regardless of whether or not Congress had passed the act.
While researchers concluded the 2004 legislation did not spur the domestic investment lawmakers wanted, the tax holiday may have benefited the U.S. economy in other ways. “The tax holiday encouraged U.S. multinationals to repatriate roughly $300 billion of foreign earnings and pay most of these earnings to shareholders,” wrote the authors of the report. “Presumably these shareholders either reinvested these funds or used them for consumption. Either of these activities could have an effect on U.S. growth, investment and employment.”
-Noel Brinkerhoff
Tax Break for Profits Went Awry (by Floyd Norris, New York Times)
Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act (National Bureau of Economic Research)
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