Bring profits home and create jobs? Maybe not

@CNNMoney October 14, 2011: 5:51 AM ET
Will a foreign profits tax break help the economy?

Will a foreign profits tax break help the economy?

NEW YORK (CNNMoney) -- In a time of high unemployment, slow growth and record debt, there's been a renewed push by many on Capitol Hill to give companies a tax break if they bring their foreign profits home.

The problem is there is very little agreement on whether a foreign profits tax break would help the economy.

Proponents from the left and right say it could create jobs and boost revenue. Critics -- also from the left and right -- say it would do just the opposite, costing the economy jobs and the government revenue.

Just this week, a group of fiscally conservative House Democrats sent a letter to the congressional debt committee endorsing the idea, while Senate Democrats Carl Levin and Kent Conrad sent a letter urging the panel to reject it.

And both sides are pointing to various studies of a repatriation tax holiday in 2004 to bolster their case.

What the debate's all about: Bipartisan bills in the House and Senate would coax U.S.-based companies to bring home profits they made abroad by offering them a lower tax rate on those earnings than the 35% imposed on profits made on U.S. soil.

Right now, earnings made abroad aren't subject to U.S. tax until they're "repatriated" through the distribution of dividends from the company's foreign subsidiary to the parent corporation.

Hiring gains momentum

As a result, proponents of the tax break say, companies have more than $1 trillion "trapped" abroad in low-tax countries. That money, they argue, could be put to much better use in the U.S. economy.

It sounds logical. But the truth is that the money is not really locked out of the United States at all, said corporate tax expert Edward Kleinbard, a former chief of staff for the Joint Committee on Taxation.

"A large portion of these earnings is kept in liquid investments, and those in turn invariably are in U.S. dollar liabilities of U.S. borrowers, like U.S. bank deposits, commercial paper, and Treasuries. All those investments already are fully at work somewhere in the U.S. economy," Kleinbard said.

What's more, Kleinbard said, the large multinational corporations that would benefit most from a repatriation holiday are not exactly hard up for cash. On the contrary, they have a lot of money sitting on the sidelines and have access to low-cost debt financing. So if they wanted to make more of an investment on U.S. soil they could, Kleinbard notes.

The Joint Committee on Taxation estimates that a repatriation "holiday" could boost revenue by about $26 billion over the first three years -- but lose as much as $80 billion over the next decade.

And the Senate's permanent subcommittee on investigations, which Sen. Levin chairs, released a report this week that said the 2004 tax holiday resulted in a loss of nearly 21,000 jobs among the top 15 repatriating corporations, and cited other studies which found no evidence that the holiday increased overall employment.

Proponents of the holiday challenge JCT's assumptions and assert that Levin's report is "one-sided." They point instead to a study done by economist Douglas Holtz-Eakin for the U.S. Chamber of Commerce.

Holtz-Eakin, a former director of the Congressional Budget Office, estimates that a repatriation holiday could result in the creation of roughly 2.9 million jobs and a $360 billion boost to GDP. To top of page

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