Friday, June 05, 2009

New evidence on Bush's tax amnesty

From the NY Times:

"It was called the “Homeland Investment Act,” and was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs. It gave international companies a large one-time tax break on overseas profits, but only if the money was used for specified investments in the United States."

This was a measure enacted by the administration of former U.S. President George W. Bush in 2004 that gave a tax amnesty to multinationals who had been keeping money, tax-free, offshore: it allowed them to bring back that money, and pay a tax rate of 5.25%, instead of the normal 35% corporate tax rate. The idea was that they should use that money to build things in the United States, and the law specifically said the money could not be used to raise dividends or to repurchase shares. About $300 billion whooshed back into the United States through the loophole. It was pushed by a spooky-sounding group called the Homeland Investment Coalition which forecast that the measure would help the US economy by "increasing domestic investment in plant, equipment, R.& D. and job creation."

Guess what happened.

"About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends."


The new report, entitled "Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act," is the most detailed analysis of what happened, and was produced by three leading economists, one of whom was a Bush administration official involved with the original plan. As the NY Times explains:

“'Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions,'” concluded the study. . . The restrictions on how the money will be spent seem to have been completely ineffective."

It gets worse:

"One fact found by the study indicates that some of the repatriated money was not even really returned to the United States, contrary to the intent of the law. Companies knew of the tax holiday in 2004, and many of them chose to “invest” money that year in foreign subsidiaries that had profits subject to American taxes if they were brought back to the United States. They then brought the profits back in 2005, getting the tax break while not reducing the continuing foreign investment. Ms. Forbes said about $100 billion left the United States and came right back, in a process the paper calls 'round-tripping.'"

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