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August 1, 2005
American Job Creation Act - not
Last year, Congress passed the American Jobs Creation Act which gave companies a tax break if they repatriated their overseas profits. Well, according to Business Week, "Profits Head Homeward, But Where Are The Jobs?", the bill is not necessarily living up to its billing:
U.S.-based companies are on track to repatriate upwards of $520 billion by the end of December, estimates Henry "Chip" Dickson, chief U.S. equity strategist at Lehman Brothers Inc.
. . .
But if there's little doubt the money is pouring in, figuring out exactly where it's going is another matter. Though the bill was promoted as a job-creation measure, regulations set by the U.S. Treasury leave companies wide leeway in how they use their repatriated profits. Hiring, capital investment, research and development, marketing, acquisitions, pension funding, and debt repayment all qualify -- and companies do not have to disclose specifics of their spending plans. They also have three years to allocate the cash. Moreover, if a company plows its foreign profits into research and development, for instance, it could take money previously earmarked for research and use it elsewhere. "You can't trace the money," points out Mickey D. Levy, chief economist at Bank of America Corp.
Still, some companies are starting to show how they're putting their newfound treasure to use. In June, Pfizer paid $1.9 billion for Vicuron Pharmaceuticals Inc. (MICU ), a King of Prussia (Pa.) biotech firm. Pfizer also has initiated a $5 billion stock buyback -- though the company says that isn't a direct result of the profits it's shipping home, since share repurchases aren't allowed under the Treasury regs. But a spokesman for the New York-based drugmaker acknowledges: "It's hard to say where money is going to and coming from."
One thing is clear, however: The money piling in from abroad as the result of the Jobs Creation Act has done little to actually spur hiring. In fact, six of the 10 companies repatriating the biggest totals are axing workers in the U.S. They include HP, which announced July 19 that it would cut its head count by 14,500 in the U.S. and abroad, and Pfizer, which has said it will shutter 20 factories with undisclosed U.S. job losses to lower costs by $4 billion by 2008.
Oddly, the repatriation is also cutting into profits. The reason: Even that measly 5.25% rate means companies must pay higher taxes than they had budgeted when the earnings were tucked away outside the U.S. Pfizer has taken a $1.7 billion charge to cover taxes on its foreign profits in the first half, while Merck & Co. (MRK) has said it would have to take a one-time charge of $1 billion if it goes ahead with plans to bring home $15 billion.
Use of the tax code to achieve specific policy has always been tricky -- but that doesn't stop policy makers from trying. There are notable successes, such as the mortgage interest deduction that has spurred homeownership (and contributed to the real estate bubble, according to some). But there are also numerous programs that exist through shear momentum. The US tax code is the biggest example of our industrial policy. Yes, we have an industrial policy even though the use of that word is forbidden in polite company. It is hidden away in the closest of the tax code where only lobbyists accountants and tax attorneys can play with it.
It is unclear whether many of these industrial policies have anything to do with either helping or hindering the I-Cubed Economy. I would hope that the President's tax reform commission is looking at the relevance of these hidden policies - but I am not optimistic. Maybe the case of the American Job Not-Creation Act might spur greater scrutiny.
Posted by Ken Jarboe at August 1, 2005 10:25 AM
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