International Taxes

Business leaders press administration for repeat on tax break

U.S. business groups are trying to convince the Obama administration to embrace a tax break that would allow multinationals to return money earned abroad to the U.S.

The National Association of Manufacturers and other groups argue allowing companies to “repatriate” money earned abroad to the U.S. at a lower tax rate could spur the economy by providing businesses with a burst of cash they could invest in their companies.

{mosads}“The business community is looking at ways to jumpstart the economic recovery and here is one you could do without increasing the deficit,” said Dorothy Coleman, vice president of tax and domestic economic policy for the manufacturers.

The Republican-controlled Congress used the tactic as part of a 2004 tax bill. It temporarily slashed the 35 percent corporate tax rate to 5.25 percent on foreign profits returned to the U.S. to spur investment.

More than 800 companies heeded the call and ponied up over $360 billion in revenue that likely would not have been returned to the U.S. and taxed under ordinary circumstances.

Business leaders are now arguing a repeat performance could boost the struggling economy, and would love to see the issue come up in the lame-duck session of Congress. So far, however, they have been unable to convince the Obama administration, which has doubts over whether the infusion would lead to jobs.

“There is increasing discussion in the business community about it, but at this point it hasn’t really jelled into a specific proposal,” Coleman said.

Business groups estimate roughly $1 trillion in revenue sits offshore and could return to the U.S. under a plan similar to the one used in 2004.

But there are questions over whether the 2004 legislation spurred growth or created jobs.

A National Bureau of Economic Research study concluded that few jobs were created by the 2004 repatriation, and that most of the money instead when to stockholders of multinational companies.

The bill, the Homeland Investment Act of 2004, stipulated that the money could not go to dividends or to repurchase stock shares. Yet the study found that roughly 92 percent of the proceeds that came ashore went to shareholders in the way of buybacks or dividends.

“There is no evidence that companies that took advantage of the tax break — which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate — used the money as Congress expected,” reported The New York Times shortly after the study was released.

Coleman argues that proving the 2004 bill was a bust is tricky, since directly linking repatriated profits to shareholders is extremely difficult.

“It generated economic activity; whether you can tie jobs to it or not is a lot more difficult,” she acknowledged.

The report concluded that repatriated funds did not increase domestic investment, employment or research and development. Because of this finding, some on K Street believe it will be extremely difficult to get another repatriation bill through Congress.

Another problem is the lack of trust between congressional Democrats and the Obama administration and multinational companies.

Democrats faced with a tough reelection climate because of the economy are frustrated that the 500 largest U.S. non-financial corporations, said to be sitting on more than $1 trillion in profits after the second quarter, have not been spending that largesse.

U.S. businesses argue companies that have money are being conservative, given doubts about the economic recovery and uncertainty over Washington policy. The administration also has targeted multinationals with tax increases on income earned abroad in both of Obama’s budget proposals, though if Republicans win back the House there is little chance of such a proposal becoming law.

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