Sunday, May 1, 2011

Will Repatriation of Foreign Earnings at Ultra Low Tax Rates Create U.S. Jobs? Not if 2004 is an Example

Much of the dogma being spread by certain parts of the business and political community, is that if you just allow U.S. multinational companies who have offshored much of their earnings to bring that money back home (tax free or nearly so of course), a bountiful plethora of jobs shall descend on the country.  Unfortunately, that fiction fails to reconcile with what happened the last time we tried this in 2004.  Indeed the Congressional Research Service has an interesting study (pdf here) [which actually pulls together multiple studies all showing the same thing] revealing that of the top 12 repatriating companies in 2004, 10 cut jobs in the U.S. in 2005-2006.  It would be funny if it was not so sad.

Now of course there could be solutions to this issue, such as allowing monies to be brought back at very low tax rates in 1:1 relation for any job created stateside that lasted say 3 years.  You'd have to word it that way so these corporations did not create a flurry of temporary jobs for 3 months to repatriate the money and then dissolve all the positions immediately after they received the tax benefit.  But that sort of solution would make too much sense.

So where did all the money from the 2004 act go?  Mostly to shareholders in the form of stock buybacks and the like.  Is that "bad"?  Not necessarily - but let's at least have an honest discussion about what most companies are going to do with the money.  We have enough dogma in society. 

Ironically, the use of this repatriated money was strictly prohibited by law for stock purchases, but since money is "fungible" the companies could claim it was not the money they brought back to the States from overseas that was used to the stock buyback - Cramerica baby....

A number of researchers have studied the impact of the reduction in the tax on repatriated
earnings that came out of the American Jobs Creation Act. The studies have generally focused on
two particular responses: the level of repatriations and the impact on economic growth. In short,
the studies generally conclude that the reduction in the tax rate on repatriated earnings led to a
sharp increase in the level of repatriated earnings, but that the repatriations did not increase
domestic investment or employment. They further conclude that much of the repatriations were
returned to shareholders through stock repurchases.

Building upon the event study literature, a series of empirical econometric studies have concluded
that the American Jobs Creation Act repatriation provisions did not increase domestic economic
Dharmapala et al. find that repatriations had a small and statistically insignificant impact
both on domestic capital expenditures and employment. Clemons and Kinney, similarly, are
unable to find evidence that investment expenditures increased in corporations that utilized the
repatriation provisions of the JOBS Act. In summary, these studies both found the repatriation
provisions to be an ineffective means of increasing economic growth.

There is some empirical evidence, however, that the repatriations were used to return money to
shareholders though stock repurchase programs. Dharmapala et al. found that a $1 increase in
repatriations increased stock repurchases by $0.91, a use prohibited
under the American Jobs
Creation Act. (Note that because of the fungibility of money, firms that use part of the repatriation
to repurchase shares may not violate the law).


Here are the companies who repatriated the most dollars in 2004, and then went on to create American jobs slash their American workforce with all that low taxed money. 
  1. Pfizer: $37B repatriated = 10,000 U.S. jobs lost in 2005-2006
  2. Merck: $15.9B repatriated = 7,000 U.S. jobs lost in 2005-2006
  3. Hewlett Packard: $14.5B repatriated = 14,500 U.S. jobs lost in 2005-2006
You get the point....


The actual pattern of repatriations observed after enactment of the American Jobs Creation Act
validated the short-run economic prediction. According to the Internal Revenue Service, 843 of
the roughly 9,700 eligible corporations took advantage of the deduction.
  This sub-set of eligible
corporations repatriated $312 billion in qualified earnings and created total deductions of $265
billion. Using the most recent year of data available, the data suggest that approximately one-third
of all offshore earnings were repatriated in the tax year after enactment. As way of comparison,
base dividends for the same corporations total approximately $34 billion and suggest a normal
repatriation rate of little more than 4%. Thus, not controlling for other factors, the rate reduction
resulted in a greater-than eight-fold increase in repatriations.

The IRS study of the provision, cited above, provided information on the recipients. The benefits
of the repatriation provision are not evenly spread across industries. The pharmaceutical and
medicine industry accounted for $99 billion in repatriations or 32% of the total. The computer
and electronic equipment industry accounted for $58 billion or 18% of the total. Thus these two
industries accounted for half of the repatriations.
Most of the dividends were repatriated from low
tax countries or tax havens.

The benefits were also highly concentrated in a few firms. According to a recent study, five firms
(Pfizer, Merck, Hewlett-Packard, Johnson & Johnson, and IBM) are responsible for $88 billion,
over a quarter (28%) of total repatriations.  The top 10 firms (adding Schering-Plough, Du Pont,
Bristol-Myers Squibb, Eli Lilly, and PepsiCo) accounted for 42%.
The top 15 (adding Procter and
Gamble, Intel, Coca-Cola, Altria, and Motorola), accounted for over half (52%).

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