The Global Tax Dodgers: How Big Business Keeps Money Overseas Instead of Creating Jobs at Home
By now the story is familiar. For the last decade US-based business corporations have been engaged in the massive offshoring of good jobs to high-growth, low-wage areas of the world, especially China and India. In general, these companies have found offshoring to be immensely profitable. For working people in the United States to gain some benefit from this globalization process, US-based corporations must repatriate some of their foreign profits to invest in high value-added job opportunities back home.
Yet prevailing US tax law both encourages offshoring and discourages the repatriation of profits. In principle, US individuals and corporations are supposed to pay US taxes on their worldwide income. Through an overseas tax deferral law, however, a US company does not pay the 35 percent corporation tax on foreign earnings until it repatriates these profits to the United States. The tax law gives US corporations an added incentive not only to offshore employment but also to reinvest the earnings of offshored operations outside the United States.
The deferral law has a long history, dating back to 1960 when the Eisenhower administration wanted to encourage an expanded US business presence around the world. From 1961 to 1963, President Kennedy tried, without success, to get rid of the law, arguing that it resulted in the export of US jobs and deprived the United States of tax revenues. Since then, the Democrats have tried from time to time to rescind this corporate tax privilege.
In June 1976, for example, an attempt to overturn the law narrowly failed in the US Senate. As observed in the Wall Street Journal just before the Senate vote: “Closing some tax ‘loopholes’ of corporations and the rich is required for its own sake, liberals say, and to help finance full extension of last year’s tax cuts and an immediate tax break for retired persons.” (From “Senate Liberals to Renew Attempts at Cut In Tax Benefits for Corporations, the Rich,” June 28, 1976). On the day after the vote, the New York Times reported: “The defeat by a vote of 45 to 44 was another in a series for organized labor and its supporters in the Senate who charge that thousands of United States jobs are lost because multinationals are encouraged by the deferral tax advantage to build plants overseas.” (From “Tax Law Retained for Multinationals,” June 30, 1976).
Fast forward to February 2004 when Sen. John Kerry, a declared candidate for the Democratic presidential nomination, issued a press release that indicated his objection to the tax deferral law in no uncertain terms:
My economic policy is not to export American jobs, but to reward companies for creating and keeping good jobs in America. Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas.
The preferred approach of the Bush administration to inducing repatriation of foreign profits was the Homeland Investment Act as part of the American Job Creation Act of 2004. It provided a corporate tax rate of 5.25% for profits repatriated in one fiscal year, with the stipulation that these profits had to be used for investments that create jobs. The Act expressly prohibited the use of these funds to pay dividends or do stock buybacks. US corporations responded by repatriating $299 billion in profits in 2005, compared with an average of $62 billion in 2000-2004, and a subsequent decline to $102 billion in 2006.
A study of the impacts of the tax break by Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes found, however, that “[r]ather than being associated with increased expenditures on domestic investment or employment, repatriations were associated with significantly higher levels of payouts to shareholders, mainly taking the form of share repurchases. Estimates imply that a $1 increase in repatriations was associated with an increase in payouts to shareholders of between $0.60 and $0.92, depending on the specification.” The authors suggest that companies were able to make these distributions to shareholders without violating the terms of the repatriation legislation by using the repatriated funds “to pay for investment, hiring, or R&D that was already planned, thereby releasing [domestic] cash that had previously been allocated for these purposes to be used for payouts to shareholders.”