The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending
.. “There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore,”
.. repeating the 2004 repatriation tax break has already come under criticism from skeptics, including the conservative think tank the Heritage Foundation, who have argued that companies aren’t low on capital and the tax break won’t nudge them into making any investments they wouldn’t already make.
.. The five companies that benefitted the most from the 2004 tax break included Pfizer Inc.,PFE -0.08% Merck & Co . MRK -0.11% , Hewlett-Packard Co. HPQ +0.14% , Johnson & Johnson JNJ -0.49% and International Business Machines Corp. IBM -1.11% , repatriating $88 billion, or 28% of the total amount brought back to the U.S., according to the report.
.. The report noted that Pfizer had the single largest share of the repatriated profits, bringing home $35.5 billion in foreign earnings, while also cutting 11,748 U.S. jobs between 2004 and 2007. Similarly, IBM brought back $9.5 billion, but cut 12,830 jobs
.. Meanwhile, the top 15 repatriating companies also accelerated their spending on stock buybacks and executive compensation after the tax break. The top five executives at those 15 companies saw their compensation rise 27% from 2004 to 2005 and then another 30% between 2005 to 2006.
.. Companies brought back funds held in areas that the Government Accountability Office has labeled tax havens, including Switzerland, the Bahamas, Bermuda, the Cayman Islands and Ireland. Of the 19 companies surveyed by the committee, seven repatriated between 90% and 100% of their funds from tax havens.
A Ford Exec Who Took the Long View
Populism could intensify if corporate tax cuts don’t yield benefits for workers.
Miller made Ford take automobile safety seriously while General Motors lagged behind. The choice cost Ford sales because some customers balked at paying for innovative equipment such as seat belts. Miller defended his policy as the right thing to do and said corporate leaders should always ask themselves whether they were willing to have their decisions publicly reported. Volkswagen executives have paid dearly for ignoring this advice, and they are not alone.
.. I wonder how many of today’s executives would be prepared to sacrifice sales and profits to do the right thing. Most of them have been taught that maximizing shareholder value is their sole responsibility—and if this means ignoring the needs of workers and the well-being of local communities, so be it.
.. The bills’ drafters are assuming that executives will use these funds to invest in their businesses.
But that’s not what happened the last time this was done, in 2004, when corporations were allowed to bring back overseas assets if they paid a tax of only 5%. During the next three years, the 15 companies that repatriated the most raised salaries for senior executives, cut more than 20,000 jobs, decreased investment in research, and expanded dividends and stock buybacks. All this happened despite the letter of the law, which specified that the funds be used for investing in research and the workforce and prohibited their use for compensating executives and repurchasing stock.
.. If these bills pass, average Americans will expect something in return—higher wages, better working conditions, and more opportunities for their children. If corporations take the money and run, public retribution will be severe.
.. America needs a new era of broad-minded, socially aware corporate leaders who understand the long-term relationship between the well-being of their companies and the well-being of their country.
.. An environment in which profits soar while wages stagnate may make for satisfied shareholders. But the revolt against the arrangements that sustain this imbalance is already under way. Today the targets are immigration and trade treaties. Tomorrow the demands could include restrictions on the ability of corporations to shutter plants and fire workers at will. The day after tomorrow, if massive corporate tax cuts yield no benefits for workers, we could see an intensified revolt against elites, not only cultural elites, but the captains of industry and finance as well.
Taking the long view is self-interest rightly understood. It means refraining from squeezing the last bit of profit out of your business right now in order to secure a flow of profit over time. The economy rests on a set of political arrangements that the people can revise and—if things get bad enough—upend.
Trump Tax Plan May Free Up Corporate Dollars, but Then What?
Reply
Consider the tantalizing $2.6 trillion in global profits that American companies are keeping out of their home accounts and out of the Internal Revenue Service’s reach.
A pro-growth tax policy would presumably aim not only to reach profits kept abroad as a tax dodge, but also to encourage companies to use that money to expand their business and hire more workers.
.. President George W. Bush set out to do in 2004 when he imposed what was meant to be a one-time reprieve and lowered the tax on those funds to 5.25 percent from a potential top rate of 35 percent.
.. companies used most of the money to pay shareholder dividends or buy back stock, not to reinvest.
.. Most of the money is not stashed in some underground vault overseas, but already in American financial institutions and capital markets. Repatriation is in effect a legal category that requires a company to book the money in the United States — and pay taxes on it — before it can be distributed to shareholders or invested domestically.
.. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”
.. companies already get something akin to tax-free repatriation by borrowing against those funds
.. A recent survey of business leaders by the international accounting and advisory firm Friedman, for example, found that just 23 percent would reinvest repatriated funds. Most would use the money to pay dividends or engage in share buybacks.
.. “A lot of the funds got overseas in the first place via tax dodges, so giving firms a tax break on the money coming back seems like compounding the problem,”
.. a territorial system without sufficient safeguards could end up encouraging even more businesses to shift profits, operations and jobs to countries with lower tax rates.
.. “What’s driving companies to engage in paper transactions is not our 35 percent tax rate,” he said, but other countries’ willingness to undercut whatever rate the United States settles on. “You can never win if you are competing against their zero tax rate.”
.. “If Republicans cut tax rates to levels that are unsustainable, everyone will believe rates will go up,” said Joseph E. Stiglitz, a Nobel Prize-winning economist and the author of several books on globalization and economic inequality. “And that means you’re going to get even less investment, because they are looking at future tax rates.”
.. “Growth is low because labor force growth is slow,” and it is only going to grow slower because of immigration restrictions, he said. “And we’re not investing in education and research, which is why productivity is slow. The notion that changing taxes is going to lead to a growth spurt is pure nonsense.”
The False Promises in President Trump’s Tax Plan
The president’s claim also defies history. Wages have long stagnated, despite tax cuts in the 1980s and 2000s, while profits, shareholder returns and executive pay have soared. Profits, whether lifted by favorable economic conditions, by tax cuts or by both, have not translated into employee raises and have instead been used for other purposes.
One is to buy back stock, which lifts share prices and, by extension, executive compensation.
.. Following a huge one-off corporate tax cut in 2004, big piles of corporate cash were also used to pay dividends to shareholders, settle legal issues and finance severance packages for layoffs.
.. Mr. Trump has proposed cutting the top corporate rate from 35 percent to 15 percent, a point he emphasized on Wednesday despite warnings from his economic advisers that a cut that sizable would cause the deficit to explode... he analysis showed that the proposed Trump tax cuts would lift after-tax income for the
- top 1 percent of taxpayers by at least 11.5 percent (or an average annual tax cut of $175,000), compared with a barely perceptible
- 1.3 percent for taxpayers in the middle (or $760 in average tax savings).
.. The question is how House Republicans will deal with those potential deficits. Many of them have built their reputations as fiscal hawks.