BUSINESS

Tax Holiday May Weaken U.S. Exports: Report

10/31/2011 03:20 pm ET | Updated Dec 31, 2011

Any economic benefit that might result from a U.S. tax holiday for overseas corporate profits could be muted, or even reversed, if it strengthened the U.S. dollar and weakened exports, according to a Congressional Research Service report.

The report also questioned tying the tax break to an infrastructure bank, as proposed by some members of Congress.

The rationale for the infrastructure bank proposal "is not clear" because any short-term tax gains that could be used to fund transportation spending would be offset by greater government revenue losses later, said the October 27 report.

The report comes at a time when support on Capitol Hill for the proposal is growing, mostly among Republicans. It is being aggressively promoted by lobbyists for large multinationals, but it faces stiff opposition from many Democrats.

The Obama administration so far has refused to consider the proposal without a broad tax reform plan.

Any "stimulative impact of the repatriations on the U.S. economy would be lessened, or possibly reversed" by foreign exchange effects, said the report from CRS, a nonpartisan research arm of Congress.

"This effect could make the repatriation holiday contractionary overall during a period of less than full employment," the report said.

Some large multinationals defer paying taxes on foreign profits by keeping them abroad and not bringing them home, which is known as repatriating them. An estimated $1.2 trillion to $1.5 trillion in U.S. corporate profits is presently parked abroad avoiding the corporate income tax.

If those earnings monies were repatriated today, the corporations would have to pay the 35 percent top corporate tax rate on them. Many companies do regularly repatriate foreign profits and pay the tax, but some do not.

These tax-deferring companies do not want to pay the full tax. They are asking Congress to reduce the tax rate to 5.25 percent or something close to that so that these "trapped" overseas earnings can be repatriated. The companies are saying this would be a form of economic stimulus.

Some large firms lobbying on behalf of the holiday include Apple Inc (AAPL.O), Cisco Systems Inc (CSCO.O), Google Inc (GOOG.O), Microsoft Corp (MSFT.O), Oracle Corp (ORCL.O) and Pfizer Inc. (PFE.N)

TEMPORARY STRONGER DOLLAR

A 5.25 percent tax holiday would provide a one-time jolt of new government tax revenue of $26 billion, said the Joint Committee on Taxation, another research arm of Congress.

But it would cost taxpayers a net $79 billion in lost revenue over 10 years, the committee has estimated.

The last such tax holiday was approved under the Bush administration in 2004-2005. It triggered a burst of foreign profits coming into the United States in the last four months of 2005, said Andrew Busch, a currency and public policy strategist with BMO Capital Markets in Chicago.

That quick burst of repatriated cash strengthened the dollar by about 4 percent against the Japanese yen during those four months, he said.

If a sudden inflow of about $1.3 trillion were to come into the country in a few months, it could boost the dollar by up to 7 percent, Busch said.

U.S. exporters prefer a weak U.S. dollar because it makes their goods and services less expensive overseas. A repatriation holiday would increase demand for the dollar as companies convert their foreign earnings to cash. Any rise in dollar demand and price would put pressure on exporters.

Senator Charles Schumer of New York has suggested the proceeds from a repatriation holiday be used to fund transportation projects from a federal infrastructure bank. But those proceeds would be limited in the short term, CRS said.

House of Representatives Democratic leader Nancy Pelosi said on Friday she could support a repatriation holiday if it creates new jobs.

Legislation calling for a 5.25 percent repatriation tax rate has bipartisan support in the Senate. Four of the seven major Republican presidential candidates support a repatriation holiday.

(Reporting by Patrick Temple-West, editing by Matthew Lewis)

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