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Tax Break: Unfair "Gift?"

February 14, 2005

A controversy is brewing over the American Jobs Creation Act of 2004, which created a one-year tax holiday offering companies a 5.25% tax rate instead of the normal 35% tax rate on profits repatriated from abroad. Companies are usually forced to keep their profits abroad to avoid high US taxes. In 2003, US corporations added $119.2 billion to undistributed foreign earnings - 75% of their total foreign profits, and brought back only $39.9 billion to the US.

The tax holiday may result in the repatriation of an estimated $320 billion in foreign profits. The short-sighted political class sought to target this money towards "job creation" to win votes, as if the direct hiring of workers is the only corporate activity that benefits the US economy. The law was written to apply the tax break to certain uses of cash such as advertising and marketing expenses, acquisitions, research and development, debt reduction, funding employee-benefit plans and payment of legal liabilities. Shareholder dividends or stock buybacks are not permissible uses of repatriated cash. Fortunately, the pols failed to anticipate that a company can merely shift its financing around via increased borrowing in order to pay dividends and still take advantage of the tax holiday. And though this may not create jobs in the way the government would like, shareholders are the ultimate job creators.

Rep. Pete Stark (D-CA) calls the tax break "nothing more than a gift for these companies." He laments that "There's absolutely no indication that this will increase anything [jobs]." Politicians always feel entitled to companies' money, and think of a tax cut as "giving" money away. But in this case the money would have been left overseas without the tax holiday.

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