How the Last Profit Repatriation Failed to Create Jobs

10/16/2017 09:18 am ET
President George W. Bush speaks to corporate executives, economists, and academics during the closing of the two-day White Ho
Alex Wong/Getty Images
President George W. Bush speaks to corporate executives, economists, and academics during the closing of the two-day White House Conference on the Economy on December 16, 2004.

The Trump Administration and congressional Republicans are preparing to unveil a tax package that would cut corporate taxes on overseas profits, but a slew of academic and government studies show that the same tactic failed to create jobs after it was enacted in 2004.

Veterans of that tax battle—including insiders from President Bush’s economic team—warned beforehand that the one-year tax cut on overseas profits would fail, according to several accounts shared with TYT by those veterans (see related story).

At an event in Springfield, Missouri, on August 30, Trump said he wants to sign legislation that will reduce “the crushing tax burden on our companies and on our workers.” One way to do that, according to Trump, is to cut the tax rate on corporations that bring overseas profits back into the United States—a measure known as repatriation. The idea is to induce multinational companies to bring back to the U.S. profits earned and kept overseas.

Corporate overseas profits can be stashed outside the U.S. using various methods, including moving corporate headquarters to another country. These profits are not taxed domestically.

In the past, Trump has floated the idea of a 10 percent tax rate on such profits, though it’s not clear what the final rates will be for repatriating existing overseas profits, or overseas profits earned in the future.

A repatriation holiday would encourage companies to “return trillions and trillions of dollars to our economy,” Trump told the Missouri audience. There is an estimated $2.6 trillion held overseas by multinational U.S. corporations, according to the research and consulting company Capital Economics.

But a wealth of studies show that the prior tax repatriation holiday did nothing to boost employment. Study after study came to that conclusion in the aftermath of the 2004 tax repatriation holiday passed during the Bush Administration. That measure trimmed corporate taxes on overseas profits being brought into the U.S. to 5.25 percent.

“The literature generally finds that the one-off repatriation provision was not effective in spurring investment,” Phillip Swagel, a former chief of staff for Bush’s Council of Economic Advisers, told TYT.

One of the more oft-cited studies on the tax measure was published in The Journal of Finance. Coauthored by Kristin Forbes, a former member of the Bush Council of Economic Advisers, it set out to uncover what happened with the money repatriated into the U.S. after the 2004 measure became law.

The study found that every repatriated dollar led to a “$0.92 increase in payouts to shareholders.” The holiday “did not lead to an increase in domestic investment, domestic employment or R&D [research and development], even for the firms that lobbied for the tax holiday stating these intentions,” the study concluded.

Instead of using the tax cut to increase domestic employment, many companies cut jobs. Fifty-eight corporations that benefited from the tax holiday slashed almost 600,000 jobs from 2004 to 2011, according to a study done by the Institute for Policy Studies.

A 2011 Senate report authored by Democratic Sen. Carl Levin echoed those conclusions. It surveyed corporations that repatriated profits, and found that the top 15 cut 20,931 jobs.

(The report did not get Republican support. Levin’s staff told Politico at the time that the report was bipartisan, though an anonymous GOP staffer told Politico the report was “partisan.”)

The report said the 2004 repatriation did not “achieve its goal of increasing jobs and domestic investment in research and development,” and that it “did little more than enrich corporate shareholders and executives while providing an estimated $3.3 billion tax windfall for some of the largest multinational corporations.”

The report also found that in the year after the holiday, the top 15 corporations repatriating profits increased stock buybacks by 16 percent, and annual compensation for top executives by 27 percent. Corporations’ shifting of profits to overseas havens increased.

These conclusions have been bolstered even by one of the companies expected to benefit from new repatriation tax cuts. In October 2011, as Congress was considering a new repatriation holiday, Goldman Sachs weighed in on the debate. The financial firm, which reportedly held $28.6 billion in offshore earnings last year, said “the short-term economic benefits of such a policy would likely be minimal.”

More recently, Goldman Sachs estimated last month that half of newly repatriated profits would go toward stock buybacks and dividends.

It’s one issue on which Wall Street and progressive think tanks can agree. “There’s an overwhelming consensus that [the tax holiday] did not achieve what it intended to do, in terms of increasing private investment, [research and development], and hiring,” said Chye-Ching Huang, deputy director of federal tax policy at the Center on Budget and Policy Priorities.

The 2004 holiday “was an abysmal failure,” she told TYT. “Companies paid out cash to shareholders, rather than expand operations or create new jobs.”

Critics of a corporate repatriation holiday also say the idea is unfair to domestic companies because multinational corporations who repatriate overseas profits would pay much lower taxes than companies that kept profits in the U.S..

Even if lower taxes on repatriated profits don’t help to create jobs, they still may serve a political purpose.

Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, said that one possible reason the Trump team may like the repatriation proposal is it would “paper over” the budget hole that tax cuts for the rich would create by increasing the amount of money flowing into U.S. coffers, albeit at a reduced rate.

“It’s a helpful gimmick for anyone seeking to conceal the cost of a broader tax cut,” said Gardner.

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