Hey, Congress, Look At What Happened Last Time You Got Duped Into Letting Companies 'Repatriate' Foreign Cash...

ScreenshotApple CEO Tim Cook testified to Congress about Apple’s tax-dodging today.

He did a superb job.

Within minutes, he had parried a few lame attacks from Senators Levin and McCain. And for the rest of the hearing, he had the rest of the sub-Committee eating out of his hand.

As Cook explained, Apple does indeed employ spectacularly successful tax-dodging techniques. But they’re all perfectly legal. So, as is often the case, if Congress is looking for someone to blame, Congress can start by looking in the mirror.

Not long into Tim Cook’s testimony, Congress began asking him for advice on how to change the tax code to encourage companies to use their cash to invest in the United States.

Cook said that Congress should cut the “repatriation” tax on cash earned overseas from 35% to a “single-digit” percentage. This cut, Cook suggested, would encourage so many more companies to repatriate cash that it would be revenue neutral. The government would reap less tax per dollar of repatriated cash, but a lot more cash would get repatriated.

This might actually be an excellent idea.

But the sub-text of the discussion was that, if companies repatriated more cash, they would use it to “invest in America”–hiring more Americans, building more plants, etc.

That’s a nice theory.

Based on historical precedent, however, it’s also a bunch of crap.

In 2004, you may recall, Congress gave companies a “repatriation holiday” that allowed them to bring boatloads of cash home without paying tax. The idea was that corporations would use this cash to invest in America.

So, did companies actually use the cash to invest in America?

As if!

According to a 2011 post-mortem unearthed by Anthony DeRosa of Reuters, here’s what happened after the repatriation bonanza:

  • Companies reduced their American workforces
  • Companies did not invest any more in research and development
  • Companies increased their stock repurchases
  • Companies paid their executives more
  • Only huge multi-national companies benefitted
  • Cash balances radically increased

“Repatriation,” Congress concluded, was a “failed tax policy.”

Here are the details:1. U.S. Jobs Lost Rather Than Gained. After repatriating over $150 billion under the 2004 American Jobs Creation Act (AJCA), the top 15 repatriating corporations reduced their overall U.S. workforce by 20,931 jobs, while broad-based studies of all 840 repatriating corporations found no evidence that repatriated funds increased overall U.S. employment. 

2. Research and Development Expenditures Did Not Accelerate. After repatriating over $150 billion, the 15 top repatriating corporations showed slightdecreases in the pace of their U.S. research and development expenditures, while broad-based studies of all 840 repatriating corporations found no evidence that repatriation funds increased overall U.S. research and development outlays. 

3. Stock Repurchases Increased After Repatriation. Despite a prohibition on using repatriated funds for stock repurchases, the top 15 repatriating corporations accelerated their spending on stock buybacks after repatriation, increasing them 16% from 2004 to 2005, and 38% from 2005 to 2006, while a broad-based study of all 840 repatriating corporations estimated that each extra dollar of repatriated cash was associated with an increase of between 60 and 92 cents in payouts to shareholders.

4. Executive Compensation Increased After Repatriation. Despite a prohibition on using repatriated funds for executive compensation, after repatriating over $150 billion, annual compensation for the top five executives at the top 15 repatriating corporations jumped 27% from 2004 to 2005, and another 30%, from 2005 to 2006, with 10 of the corporations issuing restricted stock awards of $1 million or more to senior executives.

5. Only a Narrow Sector of Multinationals Benefited. Repatriation primarily benefited a narrow slice of the American economy, returning about $140 billion in repatriated dollars to multinational corporations in the pharmaceutical and technology industries, while providing no benefit to domestic firms that chose not to engage in offshore operations or investments.

6. Most Repatriated Funds Flowed from Tax Havens. Funds were repatriated primarily from low tax or tax haven jurisdictions; seven of the surveyed corporations repatriated between 90% and 100% of their funds from tax havens.

7. Offshore Funds Increased After 2004 Repatriation. Since the 2004 AJCA repatriation, the corporations that repatriated substantial sums have built up their offshore funds at a greater rate than before the AJCA, evidence that repatriation has encouraged the shifting of more corporate dollars and investments offshore.

8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations. In 2011, U.S. corporations have record domestic cash assets of around $2 trillion, indicating that that the availability of cash is not constraining hiring or domestic investment decisions and that allowing corporations to repatriate more cash would be an ineffective way to spur new jobs.

9. Repatriation is a Failed Tax Policy. The 2004 repatriation cost the U.S. Treasury an estimated net revenue loss of $3.3 billion over 10 years, produced no appreciable increase in U.S. jobs or research investments, and led to U.S. corporations directing more funds offshore.

So much for the theory that, if we cut companies a break to “repatriate” their cash, they’ll use it to invest in America.

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