Apple, Google, Microsoft seek gargantuan tax break
Congress debates jobs and Jobs
Apple, Google, Microsoft, Cisco, and a host of US megacorps are lobbying hard for a massive tax break – and they're gaining powerful friends in business, government, and labor in support of that effort.
"This is about creating jobs, expanding US businesses and strengthening American companies," representative Kevin Brady (Rep-TX) told The New York Times, lauding his bill that would lower the amount of tax US companies pay on profits made overseas then brought back to the US, from 35 per cent to 5.25 per cent.
When profits made overseas are brought back to the US, it's called repatriation. When a tax break such as the one outlined by Brady's Freedom to Invest Act is instituted, it's called a repatriation holiday.
As might be guessed, this repatriation holiday is wildly popular among US corporations. The Win America Campaign, a group founded to lobby for the tax break, lists 40 major companies and organizations among its supporters.
Win America's argument for the repatriation holiday is based on the four-letter word that is dominating American politics: jobs. "Providing American businesses with incentives to invest at home is a common sense solution that will immediately inject up to $1 trillion into our economy and provide businesses with the security and certainty they need to help get Americans back to work," they claim.
There's one problem with Win America's reasoning: a repatriation holiday was tried last decade, and it didn't create jobs.
Repatriation winners: shareholders
According to a 2008 study by the National Bureau of Economic Research (NBER), the Homeland Investment Act, passed in 2004, resulted in the bulk of the $362bn repatriated under the Act being passed to shareholders, and not used to create jobs.
"A key goal of the HIA ... was to promote investment and employment growth in the United States," the study notes, citing its "specific guidelines on how cash repatriated at the lower tax rate could be used in order to ensure that repatriations were used to further these goals."
Didn't work. "These guidelines were ineffective," the study concludes. "Estimates imply that firms returned almost all of the repatriated cash to shareholders – a use that was explicitly not permitted."
In the run-up to the HIA's passage, congress members argued that it would create over 500,000 jobs. J.P. Morgan Securities estimated that it would create about 600,000 jobs. The NBER study, however, concluded that "the HIA does not appear to have spurred the domestic investment and employment of firms that used the tax holiday to repatriate earnings from abroad."
This failure of repatriating companies to follow the HIA guidelines is of particular interest because Brady's bill is being dusted with similar sweeteners in an effort to make it more palatable to Democratic congress members.
Sources have told Fortune that Senator Chuck Schumer (Dem-NY), a veteran legislator and member of the tax law–proposing Senate Finance Committee, is shopping around the idea of tying the reparation-holiday bill to an "infrastructure bank" that would be used to support new construction projects.
Labor leader loves the idea
This idea has garnered support for the repatriation holiday from one key Democratic constituency: labor. Andy Stern of the Georgetown Public Policy Institute and former president of the 2.1 million–member Service Employees International Union, is pushing for the repatriation deal.
"We put the government's share of the money; say $30 billion, into an Infrastructure Bank," he told The Washington Post. "We could also put the money into a Green Bank or other long term job creation programs. That $30 billion would leverage $180 billion more in investment."
According to Stern's projections: "For every $1 billion in infrastructure spending, 40,000 direct and indirect jobs are created."
Other voices are calling for a repatriation holiday without any "infrastructure bank" set-asides. Last week, the self-described "moderate" think-tank Third Way held a forum entitled "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America".
At that event, representatives Jared Polis (Dem-CO) and Loretta Sanchez (Dem-CA) both argued that companies should be able to use their repatriated profits in any way they saw fit. Polis, however, did allow that "Many people, for this to be a palatable vote, want to point to a direct ironclad nexus of job creation."
This is a high-stakes game. As the NYT points out, Apple has $12 billion in overseas profits that could be repatriated, Google has $17 billion, and Microsoft has $29 billion. Estimates of the total amount that might be repatriated if the holiday is granted hover around $1 trillion.
Whether that $1 trillion would be used for job creation is, of course, unknown – although the NBER study is instructive. After all, it's estimated that US companies are now sitting on $1.9 trillion in cash – with Apple being the poster child of cash-hoarders, having reported $66bn in cash and marketable securities – and they're not using it to stimulate the economy by creating jobs.
And why should they? There's not enough discretionary income floating through the economy to boost purchasing. The problem is not a lack of corporate coin to hire workers, argues former US labor secretary Robert Reich, but instead a lack of cash in the pockets of Joe Sixpack – and it's unlikely that a repatriation holiday without a "direct ironclad nexus of job creation" would fatten workers' wallets.
And even when bolstered by guidelines such as those provided by the HIA, history has shown that repatriation holidays haven't increased jobs.
Speaking of jobs, it's arguable that the one that can actually effect change in the corporate tax code is Steve Jobs, along with his fellow corporate movers and shakers. ®
If you're not familiar with some of the gymnastics that US corporations perform in order to lower their tax liabilities, The New York Times provides a helpful video overview.