A Warning on the Likely Impact of Repeating the Corporate Tax Holiday

Not long after Congress enacted a tax holiday in 2004 for foreign profits that corporations “repatriated” to the United States, some companies that had lobbied hardest for it — pledging to use the money to invest domestically and create jobs — announced massive layoffs while using the repatriated profits mostly for things like repurchasing their own stock and paying bigger dividends to shareholders. Now, even as corporate lobbyists campaign for another tax holiday, two of the corporations that benefited the most from the first one — Pfizer and Hewlett-Packard — have announced major stock buybacks and layoffs.  Such examples, combined with abundant evidence that the 2004 holiday failed, should serve as a strong warning to any policymakers who think that repeating the holiday would significantly boost the U.S. economy. For starters, corporations are flush with cash.  As the New York Times has reported:

When Pfizer cut its research budget this year and laid off 1,100 employees, it was not because the company needed to save money.  In fact, the drug maker had so much cash left over, it decided to buy back an additional $5 billion worth of stock on top of the $4 billion already earmarked for repurchases in 2011 and beyond.  The moves, announced on the same day, might seem at odds with each other, but they represent an increasingly common pattern among American corporations, which are sitting on record amounts of cash but insist that growth opportunities are hard to find.

The Times also reports that “Hewlett-Packard announced a $10 billion stock repurchase in July, and jettisoned 500 jobs in September after it discontinued its TouchPad and smartphone product lines.” Under the first repatriation holiday, Pfizer brought $37 billion in foreign profits back to this country — more than any other company — and eliminated 10,000 jobs.  Hewlett-Packard repatriated $14.5 billion and laid off 14,500 workers. A repatriation holiday would be an even bigger mistake the second time around for several reasons. First, it would send a clear signal to companies that more holidays would come in the future, encouraging them to invest more overseas and bring the profits back during the next holiday. Second, it would encourage companies to shift profits earned in the United States to offshore tax havens to avoid U.S. corporate taxes, and then bring them back during a future tax holiday at a massively reduced tax rate. Third, it would raise deficits by tens of billions of dollars over the next decade, the Joint Tax Committee estimates. Fourth and finally, it would be deeply unfair to domestic companies, which invest in the United States and create jobs but wouldn’t be eligible for the tax break.