Repatriation Holiday Part II (update #2)

Last week, I blogged here and here about a proposed tax break that would encourage U.S. multinationals to repatriate cash to the United States.

Today, the New York Times jumped on the bandwagon, publishing an article by David Kocieniewski ("Companies Push for Tax Break on Foreign Cash"). (Note: the Kocieniewski article refers to calendar year 2005; although the underlying legislation was enacted in October 2004, most taxpayers brought cash home from their foreign subsidiaries during 2005.)

Although the Kocieniewski article echoes several of my observations, it contains additional color on the 2004 repatriation holiday:

- 800 corporations took advantage of the repatriation holiday

- According to this study by the NBER, they repatriated $312 billion

- An astonishing 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks

- 60 percent of the benefits went to just 15 of the largest U.S. multinationals

- According to Kristin J. Forbes, a professor of economics at MIT’s Sloan School of Management (and a member of President Bush’s council of economic advisers), “[f]or every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages”

As I mentioned in my original post, Big Pharma was a major beneficiary of the 2004 legislation. The Kocieniewski article explores certain actions by Merck, which used dividends from its foreign subsidiaries to support dividends and stock buybacks while cutting jobs in the United States. Members of Congress, please repeat after me: "cash is fungible ... cash is fungible ... cash is fungible."

I don't fault the large tech or pharmaceutical companies that lobbied for the 2004 legislation. Nor do I fault the U.S. multinationals that brought offshore cash back to the United States at a 5.25% rate. (Compliance with existing tax laws is not "corporate tax avoidance," a topic that I will discuss more extensively in future posts.)

I do assign fault to the Bush administration and the members of Congress (Republican and Democrat) that enacted the 2004 legislation. The 2004 repatriation holiday was bad tax policy. Perhaps it was motivated by "positive" wishful thinking, but it seems to have been motivated by "stick your head in the sand" wishful thinking. Or, more likely, well-timed political donations to grease the Congressional wheels. We don't need a sequel.

I'll conclude this post with by repeating the conclusion from my last post. Any repatriation incentives should be linked to comprehensive income tax reform, not enacted out of desperation to "do something."