Here It Comes: Democrats Considering "Tax Repatriation Holiday" Economic Massacre

Submitted by Tyler Durden
06/22/2011 15:49 -0400
143 comments
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Here comes the headless horseman cavalry:

* SCHUMER SAYS SENATE DEMOCRATS WEIGH TAX REPATRIATION HOLIDAY
* SCHUMER WOULD USE REVENUE FROM HOLIDAY FOR INFRASTRUCTURE JOBS

How the second sound bite makes any sense, we will need to ask someone with a full frontal lobotomy. What revenue? Where it is coming from? Doesn't Schumer have some Chinese currency manipulation bill he has to be submitting to Senate for the nth time instead of boosting multinational EPS through buybacks, while killing even more US jobs? Luckily it was just yesterday that we discussed that this whole process will do nothing at all to boost jobs as captured best by Kristin J. Forbes, an MIT economics professor who was on the Bush team back when the Homeland Investment Act in 2005 was enacted, who said: "For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages." Another economic disaster in the making, brought to you by the clueless captain of this country.

Full post from yesterday on this very topic:

The Lost Cause That Is Tax Repatriation, Or The Folly Of The Homeland Investment Act Part 2

Just like back in January when rumors of tax repatriation holiday started creeping up, the past week has seen a surge in speculation that the Homeland Investment Act part 2 may be coming back. Unfortunately, neither now, nor in January, nor during the original HIA back in 2005, did this tax repatriation of billions in cash do absolutely anything to stimulate the economy, and in fact the waves of layoffs that followed likely added to the weakness that would become apparent with the December 2007 transition into the Second Great Depression. Yet that will not stop big multinational companies from lobbying for this one time gift which will allows management teams to buy back shares, and lock in individual profits on their insider holdings (certainly expect an unseen wave of insider selling in the aftermath of a HIA 2 should one be implemented). As for the economic rationale, there is none. We discussed this back in January and February extensively, but for hose who may have forgotten, here is a good recap courtesy of David Rosenberg's latest leter to clients.

Tax Breaks for Companies

At a time when nearly half of the ranks of the unemployed have been looking for work fruitlessly for at least six months, and a time when they are about to lose their long-term jobless benefits, it is amazing to see so many folks out there calling for the White House to stimulate the economy by allowing businesses a form of tax holiday to bring home their locked-up profits from abroad. This is being touted as a low-cost scheme to get the economy moving (the NYT had a good article on this proposed strategy yesterday).

First off, the major contributors to employment are small businesses, and they don't have locked up earnings abroad — they are paying their 35% top marginal rate rather than avoiding it. Second, the Bush team tried this gimmick in 2005 with absolutely no impact on capital spending or employment growth, though it sure did help out on the stock buyback programs and divided payouts. So would it be good for the stock market? Very likely. But a lot of this locked-up cash sitting abroad is centered in the pharma industry and as such it was nifty to see how the NYT tracked what Merck did with the $15.9 billion it brought home back in 2005 — "according to regulatory filings, though, the company cut its work force and capital spending in this country in the three years that followed."

Here is what Kristin J. Forbes, an MIT economics professor who was on the Bush team back then (and led a study by the NBER showing there to be little impact outside of helping reduce the deficit temporarily) said on the matter:

"For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages."

Quite an admission of failure. It does stand to reason as to why such a policy today would have any impact since this is not exactly a business sector that is starving for liquithty as it is.

And below we repost some of the salient points from Citi's Steven Englander who essentially said the same thing 6 months ago:

HIA-2 under discussion

* HIA is attractive as a way of reducing effective corporate taxes temporarily and improving the tone of the US corporate sector, but the direct impact on investment and employment appears limited
* The total flows are likely to be much higher than in 2005
* The non-USD share is less certain but may be somewhat lower
* Central banks may see this as a golden opportunity to diversify

A renewed program to allow repatriation of foreign profits at favourable tax rates is again under discussion in the context of broader corporate tax reform. Proponents argue that it provides inexpensive stimulus to the US economy at a limited budget cost. Opponents argue that it provides few practical benefits; rather it creates incentives to keep earnings abroad in anticipation of subsequent rounds of HIA (Homeland Investment Act – the actual name of the bill was the American Jobs Creation Act of 2004, but we will use HIA-1 to refer to the 2004 bill and HIA-2 to refer to any prospective 2011 measure).

And the pros and cons:

The disadvantages:

1. In 2005, HIA-1 delivered much less in direct employment and investment than promised. For example, see “Tax Incentives and Domestic Investment: An Empirical Analysis of the Repatriation Decisions of U.S. Multinational Corporations Following the Implementation of the Homeland Investment Act of 2004â€