Bringing Profits Home

Posted Feb. 08, 2009, at 7:51 p.m.

During the presidential campaign, there was a lot of hand-wringing about U.S.-based corporations winning tax advantages for moving jobs to other countries. But what about the profits earned overseas by U.S. corporations? Some corporations are lobbying President Obama and Congress to consider offering a tax holiday of sorts on overseas earnings as a mutually beneficial way to bring capital back into the national economy.

A move to include the tax break as part of the president’s stimulus package was defeated in Congress, but the proposal has been around for several years, and likely will be floated again. It’s a low-risk venture that’s at least worth considering.

U.S. corporations now pay a 35 percent tax on overseas earnings that are brought home. According to some estimates, as much as $1 trillion in earnings is left in those countries because of the high tax. The proposal would lower the tax rate to 5.25 percent, thereby encouraging corporations to bring the profits home, where some of the money would be used to pay down company debt, which in turn would inject much-needed funds into banks. The banks, under this scenario, would be freer with credit.

An even better outcome would be for those companies to reinvest those earnings in equipment and personnel at home.

The measure won approval in 2004 for a one-year period, and an estimated $312 billion in funds was “repatriated,” according to analysis by Dr. Robert Shapiro, former undersecretary of commerce for economic affairs under President Clinton. Of the $312 billion, he wrote, $252 billion was brought back to the U.S. by manufacturing companies. The 2004 law dictated acceptable use of the funds to qualify for the low tax rate, and surveys showed that $73 billion was used to create or keep jobs; $75 billion was used in new capital spending; and $39 billion went toward paying off domestic debt. It also produced $34 billion in new federal tax revenues, making it a “free lunch,” Dr. Shapiro wrote. The same analysis suggests that about $421 billion to $565 billion would come home if the tax were lowered temporarily.

Among the benefits to corporations is that the weak U.S. dollar goes further at home than against stronger national currencies abroad.

But not everyone is onboard. Sen. Olympia Snowe, a member of the Senate Finance Committee, opposed the tax repatriation holiday amendment to the stimulus bill. “Frankly, past tax repatriation holidays didn’t work as advertised and failed to create jobs, an outcome that is certainly contradictory to our current need for rapid job creation and increased domestic investment,” she said.

Still, if no loss of tax revenue can be demonstrated, this is one corporate tax break that may be a “win-win.”

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