Repatriation Tax Holiday Push Shows Congress Turning Deaf Ear To Occupy Wall Street
WASHINGTON -- Even as protesters fed up with corporate power are occupying Wall Street, Congress is rushing to oblige it.
In an iconic example of how Congress puts big-money interests above others, bipartisan momentum is growing on Capitol Hill for a repatriation tax holiday -- a huge, temporary reduction in the tax rate on money brought back to the U.S. from offshore tax havens. Critics say the repatriation tax holiday is a multi-billion-dollar tax giveaway to the world's biggest multinational companies, with nothing in it for domestic businesses or ordinary Americans.
"I'm not sure it gets any starker than that," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.
Sens. John McCain (R-Ariz.) and Kay Hagan (D-N.C.) last week introduced a bill to lower the repatriation tax rate from 35 percent to under 9 percent for one year.
A similar bill has already been introduced in the House. Republican leaders have expressed enthusiasm for the idea, and Senate Majority Leader Harry Reid (D-Nev.) has indicated that he could support it as part of broader jobs legislation. Sen. Chuck Schumer (D-N.Y.) has been actively lobbying fellow Democrats to support the holiday as part of a deal that would use the short-term boost in tax receipts to fund a job-creating infrastructure bank.
"This is one of those things where if you're on the side supporting a repatriation tax holiday, that means that you're supporting a corporatist agenda that redistributes money upward to the rich," said Linda Beale, a Wayne State University law professor who blogs about tax policy. "There's no two ways about it."
"The main point of Occupy Wall Street -- that there is corruption of the political system -- is just proven by this," said William Lazonick, a professor of economics at the University of Massachusetts, Lowell.
Kobi Skolnick, an organizer with Occupy Wall Street, told HuffPost that the congressional enthusiasm for the tax holiday is "a reflection of the deep disconnect between the representatives of the people and the people."
The people, he said by phone from lower Manhattan, "are complaining about this corporate greed, and clearly nobody is listening."
"Who's going to benefit from this money? How many regular Americans are going to enjoy that tax break?" Skolnick asked. "It's really painful to see that there is no connection with the grievances the people have."
THEORY AND PRACTICE
The basic theory behind the holiday is that the $1 trillion-plus in cash held offshore, mostly by technology companies and pharmaceutical giants, would stimulate the economy and create jobs if returned to the U.S.
But Congress tried almost exactly the same thing in 2004, and it failed.
In 2004, the companies taking advantage of the holiday ended up laying off thousands of workers and spent most of the money they brought back from abroad buying back stock and otherwise enriching their top executives and major stockholders.
"A lot of times in life, there's uncertainty; you haven't done it before. But in this case we've done it and it failed," said Marr. "It was beyond a failure. It was an embarrassing failure."
If anything, the policy case for such a move now is even weaker than it was in 2004. The United States' biggest companies are already sitting on some $2 trillion in domestically held cash and liquid assets that they refuse to spend on job-creating measures. (See this HuffPost slideshow of the top corporate cash hoarders.)
And in this era of deficit obsession, the holiday would actually reduce federal government revenues over the long term. Congress's Joint Committee on Taxation recently estimated that while a holiday would increase federal receipts in the near term -- as companies rush to take advantage of it -- it would add $78.7 billion to the deficit over a decade by losing tax revenue on money that would have been repatriated anyway.
The holiday’s leading advocates, not surprisingly, are the companies that have the most to gain. As Bloomberg reported last month, a coalition of large companies called Working to Invest Now in America (WIN America), has assembled "an army of more than 160 lobbyists, including at least 60 who once worked for a sitting member of the House or Senate, pushing for the repatriation holiday."
The biggest members of that coalition include Apple, which has $12 billion waiting offshore, Google with $17 billion, Microsoft with $29 billion and Cisco with $32 billion.
Nevertheless, despite this narrow constituency, the bill is garnering support in Congress. "It's one of the hottest issues of this legislative season," said Scott Klinger, an associate fellow at the Institute for Policy Studies. "The only thing the parties can agree on is more failed corporate tax cuts, and that's a sad statement."
"It's odd that the only thing you can get bipartisan support for is redistribution upwards," Beale agreed.
"This is what the Occupy Wall Street thing is all about," said Lee Sheppard, contributing editor at Tax Analysts, a nonprofit publisher of tax information. "The two parties are the same. They're both beholden to business and not responsive to people."
The one significant holdout -- at least so far -- is the White House. In a long blog post in March, for instance, Treasury Department official Michael Mundaca concluded: "To pay for giving this large tax cut once again to a small group of U.S. companies without increasing the deficit, we would have to raise taxes on other U.S. businesses."
THE LESSONS OF 2004
The failure of the 2004 tax holiday has been abundantly examined and documented. A 2009 Congressional Research Service study found that the benefits were highly concentrated in a few firms. A study by three University of Kansas professors found that firms that lobbied for the 2004 provision got a 22,000 percent return on their lobbying investment.
A 2009 study entitled "Watch What I Do, Not What I Say" concluded that the repatriation resulting from the tax holiday "did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions. ... Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders."
A 2010 statistical analysis by a Northwestern University law professor detected "a dramatic increase in the rate at which firms add to their stockpile of foreign earnings kept overseas" following the 2004 law. That stockpiling is "consistent with the hypothesis that the temporary holiday conditioned firms to anticipate future such holidays and to change their behavior by placing more earnings overseas than ever before."
A report earlier this month from the Institute for Policy Studies documented the "wave of job destruction" that followed the 2004 tax holiday. (See a slideshow of the top 10 job slashers that benefited from the holiday.)
And a new report from Michigan Democratic Sen. Carl Levin's permanent subcommittee on investigations, released on Tuesday, concluded that after repatriating over $150 billion under the 2004 law, "the top 15 repatriating corporations reduced their overall U.S. workforce by 20,931 jobs." For example, Pfizer, the corporation that repatriated the most foreign earnings -- $35.5 billion -- cut 11,748 jobs in the United States from 2004 through 2007.
Instead, "annual compensation for the top five executives at the top 15 repatriating corporations jumped 27% from 2004 to 2005, and another 30%, from 2005 to 2006, with ten of the corporations issuing restricted stock awards of $1 million or more to senior executives," the report said.
Taxing repatriated income isn't a matter of companies being taxed twice on profits they made abroad, it's a matter of them being taxed at all on things like revenue from patents and trademarks they have sheltered abroad.
"If they had paid taxes elsewhere, they could bring the money back here and get credit," explained Sheppard.
Most of the money repatriated during the 2004 holiday flowed in from tax havens, the Senate subcommittee found -- not surprising, considering the biggest benefits of a tax holiday inevitably accrue to companies that have been most assiduous about sheltering vast amount of their profits in low- or no-tax countries.
According to a 2008 Government Accountability Office report, four of the companies lobbying hardest for the 2004 tax holiday -- Apple, Cisco, Microsoft and Pfizer -- operated a combined 572 sub-companies in tax shelter countries at the time.
THUMBS DOWN FROM ANALYSTS
Giving such companies a huge tax break "rewards unpatriotic corporations that, through accounting tricks, have shifted their American profits abroad," the Institute for Policy Studies' Klinger said. "They did it in 2004 and kind of laughed their way to the bank, and now they want to do it again."
And it's not just progressives and good-government groups that are finding fault with the arguments of tax holiday proponents.
Analysts for Goldman Sachs, in a September newsletter and an unpublished email to clients last week, concluded the holiday would not achieve its stated ends.
"[W]e would not expect significant changes in hiring or investment patterns," the analysts wrote. Instead, they concluded, "corporate share buybacks and dividend payments would increase." In addition, the move would "condition US multinationals to never routinely repatriate any foreign profits" again -- and would add to the deficit.
The Fitch ratings service concluded that that the legislation "is unlikely, if passed, to support growth-oriented investment by U.S. firms."
Rather, Fitch said it expects "most firms benefiting from the proposed repatriation tax relief, notably large multinational companies in the technology and pharmaceutical sectors, to prioritize share repurchases at a time when cash balances are strong and capital spending plans are increasingly uncertain in the context of slowing global growth."
Even the Heritage Foundation, which has rarely met a tax cut it didn't like, recently concluded the holiday "would, like its predecessor, have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation."
A study from the U.S. Chamber of Commerce, which is funded largely by multinational corporations, is almost alone in predicting the repatriation tax holiday would result in more jobs -- 3 million, it says, many of them the result of stock buybacks and dividend payments.
But more skeptical economists argue that, of all the ways the companies could use a sudden influx of cash, stock buybacks would be among the least productive for the economy -- and would line the pockets of the super-rich.
"These companies are not going to be making the investments that we need to get the economy going," said Lazonick, the UMass professor, who has demonstrated the direct link between stock buybacks and lavish executive pay.
Buybacks are almost guaranteed to send stock prices up by boosting earnings per outstanding share and increasing demand. Major stockholders are enriched -- with the greatest benefit accruing to the company executives with big stock options.
Contrast that with the need for investments in such things as innovation, job training and infrastructure, and, Lazonick said, "It's not simply a waste of money, it's something that's going to result in long-run economic decline."
At a press conference Tuesday, where he released his report critical of the tax holiday proposal, Sen. Levin said that it is exactly the sort of thing people like the Occupy Wall Street protesters have legitimate grievances about. Fairness in the tax code, Levin said, is a question of "whether we treat all of our citizens the same or give tax breaks to the few."
"Something is wrong in our tax code and our public policy, which has been a source of frustration in our country for many, many years, even before the current demonstrations," Levin said. "I think the current demonstrations reflect that anger and that frustration."
And the protesters in lower Manhattan seemed to agree.
"Why should they get a tax break?" asked Ariah Noetzel, a New York University student participating in the Wall Street protests on Tuesday. "All the rich calling themselves job creators when they're buying yachts and giving themselves unbelievable bonuses and salaries -- that's not investing towards creating jobs at all, and the fact that they're hiding under the label of job creators so that they don't get taxed is absurd."
Noetzel said she was over her head in student loan debt. "I just think about the situation that I know I'm going to be in and thousands and thousands of other people are going to be [in]. It's thinking about that system; you're ensuring that us poor stay poor and the rich get richer."
"This is why we are on the street, and why we will continue to be on the street," Skolnick, the Occupy Wall Street organizer, said.
Tyler Kingkade and Jordan Zakarin contributed reporting.
Dan Froomkin is senior Washington correspondent for The Huffington Post. You can send him an email, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get email alerts when he writes.
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First Posted: 10/13/2011 11:02 am Updated: 12/13/2011 4:12 am