Some of the nations largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home.
Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.
Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as the next stimulus at a conference last Wednesday in Washington.
For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly, Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas.
But thats not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.
Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.
This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program did not increase domestic investment, employment or research and development.
Indeed, 60 percent of the benefits went to just 15 of the largest United States multinational companies many of which laid off domestic workers, closed plants and shifted even more of their profits and resources abroad in hopes of cashing in on the next repatriation holiday.
Merck, the pharmaceutical giant based in Whitehouse Station, N.J., was one of those big winners. The company brought home $15.9 billion, second overall to Pfizers $37 billion. It used the money for U.S.-based research and development spending, capital investments in U.S. plants, and salaries and wages for the U.S., a Merck spokesman, Steven Campanini, said last week.
According to regulatory filings, though, the company cut its work force and capital spending in this country in the three years that followed.
Merck used the cash infusion to continue paying dividends and buying back stock for the benefit of shareholders and executives even as it was rocked by more than $8 billion in costs to settle a variety of disputes after executive missteps. Merck had to pay billions in back taxes to the I.R.S.; billions more to consumers suing because of the dangerous side effects of the painkiller Vioxx, and hundreds of millions to the Justice Department, which had accused the company of defrauding Medicare.
The tax break, part of the American Jobs Creation Act, lacked safeguards to ensure the companies used the money for investment and job creation in the United States, as Congress intended. There were no direct tracing requirements, said Jay B. Schwartz, head of Mercks international tax unit until 2006. So once the money came home, it gave you great flexibility.
