Corporate Welfare Runs Amok

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Tue, 1 Feb 2005 11:23:04 -0800 (PST)

Corporate Welfare Runs Amok

January 30, 2005

 

 

 

EDITORIAL

Corporate Welfare Runs Amok

 

Earlier this month, Johnson & Johnson became one of the first major

American corporations to sign on for a one-year " tax holiday " - a

government-sponsored opportunity for American multinationals to bring

their foreign profits back to the United States at a puny tax rate of

5.25 percent, compared with the normal corporate rate of 35 percent.

Johnson & Johnson intends to repatriate $11 billion. And that is just

the beginning of what is shaping up to be an unprecedented government

giveaway.

 

The drug giant Schering-Plough has announced a coming $9.4 billion

repatriation, and Eli Lilly has announced one for $8 billion. Many

other cash-rich companies, especially in pharmaceuticals and

technology, are expected to follow suit. Pfizer is considering whether

to repatriate $29 billion in untaxed foreign profits; Hewlett-Packard

has $14.5 billion eligible for repatriation; Intel has $6 billion. By

the end of 2005, an estimated $100 billion to $500 billion will have

found its way home. Over the long run, Congress's Joint Committee on

Taxation projects that the holiday will allow companies to avoid $3.3

billion in taxes, an estimate that many tax experts think is low.

 

The nation's corporate tax rules - combined with spotty enforcement by

an underfunded and outmuscled Internal Revenue Service - provide

strong incentives for American companies to shift their profits from

the United States to low-tax havens, such as Ireland and Luxembourg.

Once there, the profits are allowed to grow untaxed by the United

States until they are repatriated. That tax deferral is a hugely

munificent gesture - as if the country's biggest businesses had been

granted their own special I.R.A.'s.

 

But it wasn't enough for many companies that have piled up excess cash

abroad. The Homeland Investment Coalition, a roster of dozens of

America's largest corporations, lobbied vigorously - and successfully

- for a tax holiday before deigning to repatriate their overseas profits.

 

Congress's ostensible purpose for allowing the holiday is to unleash a

flood of money for job creation, hence the name of the law that

includes the holiday - the American Jobs Creation Act of 2004. But few

of the approved uses for the repatriated funds - such as debt

redemption, advertising and a catchall category of " financial

stabilization " - will lead directly, if at all, to more jobs. One

approved use - the ability to spend the money to buy other companies -

would be more likely to create layoffs, as corporate acquisitions

usually do.

 

Companies can also use the money to help pay legal liabilities, which

could prove to be a big boon for companies like the drug maker Merck,

which is sitting on some $15 billion in untaxed foreign profits and

faces an estimated $18 billion in potential claims arising from the

Vioxx debacle. Multinationals cannot use the repatriated profits to

pay dividends to shareholders, buy back their own stock or pay

executives. But because companies have a lot of flexibility in

financing their activities, they will generally be able to use the

money as they see fit while still meeting the letter of the law.

 

So the tax holiday blesses rather than curbs tax avoidance and is

structured to encourage little if any new domestic economic activity.

It establishes a horrible precedent by encouraging companies to leave

profits abroad in anticipation of future holidays. It makes fools of

companies that have routinely repatriated foreign profits at the full

corporate tax rate. And it disadvantages American companies that have

no foreign presence and thus no opportunity to reap profits at a

discounted tax rate.

 

All it will really do is what the drafters probably intended all along

- further erode the nation's corporate tax base and impugn the

system's integrity, in that way building a case for eliminating

corporate taxes altogether. That is a lousy way to make policy.

Reforms to the corporate tax system must be debated on their merits,

not under cover of some phony label like " job creation. "

 

http://www.nytimes.com/2005/01/30/opinion/30sun1.html?ei=5070 & en=a3d107d0ee59692\

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