A 2004 Offshore Tax Holiday Left 600,000 Jobless. A Decade Later, Congress Is at Risk of Making the Same Mistake
In 2004, the grass seemed greener on the other side — overseas where multinational corporations kept stashing profits. A corporate tax policy (known as “deferral”) allows U.S. corporations to defer taxes on their profits booked offshore until they are returned to the U.S. By 2004, deferral had led to a cash hoard of $527 billion, equivalent to 4.3 percent of GDP, amassing offshore.
Back then, President Bush signed the American Jobs Creation Act of 2004 (AJCA) believing that bringing home the stockpiles of cash would mean huge jobs and growth here in the U.S. The act provided a “tax holiday,” allowing corporations to return their deferred profits at an astonishingly low 5.25 percent — instead of the statutory 35% rate.
Companies — including Pfizer, Merck & Co., Hewlett-Packard, Johnson & Johnson, and IBM — immediately took advantage. Together, these five corporate giants repatriated $88 billion from their offshore accounts located in well-known tax havens such as Switzerland, the Cayman Islands, and the Bahamas. According to the IRS, some 843 companies followed suit resulting in the repatriation of $312 billion in qualified earnings. In total, the companies received $265 billion in tax deductions between 2004 to 2006.
But, the plan backfired. Many of the companies who benefited the most from the steep tax discounts actually cut jobs. A report led by the U.S. Senate’s Permanent Subcommittee on Investigations found that Pfizer, who accounted for the single largest share of repatriated profits, cut 11,748 U.S. jobs between 2004 and 2007. Likewise, IBM repatriated $9.5 billion and cut 12,830 U.S. jobs. When the smoke cleared, the 58 multinationals who benefited most from the repatriation holiday slashed an estimated 600,000 jobs.
The architects of the AJCA predicted such behavior and added provisions to prevent it. Language was included in the law prohibiting the use of repatriated funds to buy back stock, to inflate prices, and to allow senior executives to cash in on stock options. Yet, because money is fungible, 92 percent of the repatriated cash was used for stock buybacks and executive bonuses. By allocating their repatriated money into budgeted areas that were allowed under the AJCA, corporations used their repatriated funds to loosen up financial allocations elsewhere. They then used those freed up funds for stock buybacks. Startlingly, the money saved from cutting 600,000 jobs was used to fund mergers, to pay dividends, and to give raises to executives. The Senate Report found that, in 2005 alone, repatriating corporations increased stock repurchases by $61 billion. Compensation for corporate executives rose by 20 to 30 percent two years after the tax holiday, with multiple senior executives receiving “restricted stock awards” of approximately $1 million.
In the end, the offshore tax giveaway was a failure. Not only did it disappoint in its main goal to create jobs, it was followed by significant job losses among participating companies. In addition, the problem it meant to solve — that of corporations shifting their profits and jobs to tax havens — is now worse than before. Companies saw this as a precedent, and expecting another tax holiday, multinationals began shifting as much offshore as they could afford. In the decade following the AJCA, cash held offshore skyrocketed from $434 billion in 2005 to $2.4 trillion in 2015 (the latest estimates have it around $2.6 trillion in 2016). Instead of incentivizing U.S. investment, the low rate encouraged a mass migration of capital out of the U.S.
Fool Me Once, Shame on You, Fool me Twice…
Today, some lawmakers are calling for another repatriation giveaway. One plan, Representative Delaney’s Infrastructure 2.0 Act, uses a portion of the repatriated funds to pay for infrastructure. While there are strong arguments for increased investments in the nation’s infrastructure, the plan’s low effective tax rate (8.75 percent) likely loses money overtime, robbing taxpayers of future revenues. The plan’s rate is even lower than the 10 percent rate proposed by President Trump.
These plans fall short of the estimated $2 trillion needed to fix America’s crumbling infrastructure system and, worse, they will likely lead to further tax avoidance. For example, the Delaney bill will only raise an estimated $170 billion in the short term, while sending the signal to tax dodgers that stashing cash offshore will eventually be rewarded with future ‘holidays.’
Short-term tax giveaways on offshore profits that do not end deferral fail to address the problem of incentivizing profit shifting to offshore tax havens. Temporary discounts encourage offshoring. It is not the statutory rate, but the distortion made by treating foreign profits differently than domestic U.S. profits, that encourages companies to minimize their U.S. profits and maximize what they book offshore. If the objective of Congress is to create jobs then end deferral, repatriate corporate profits at the statutory rate, and use the money to adequately fund the rebuilding of the nation’s crumbling infrastructure.
Amy Zhang is an advocacy intern with the FACT Coalition.