The American Jobs Creation Act of 2004 was enacted in response to a World Trade Organization order and European Union trade sanctions related to a little known tax break for U.S. exporters. Included in the American Jobs Creation Act of 2004 was a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals, which allowed 800 corporations to repatriate 300 billion at a reduced tax rate. Recently, Senator Carl Levin (D-Mich), chairman of the Permanent Subcommittee on Investigations, initiated an investigation to examine whether these firms used the repatriated earnings to generate jobs, as was intended. At an American Enterprise Institute event, University of Connecticut economist, Dhammika Dharmapala discussed the results from his paper on the tax holiday and Alex Brill, AEI and Rohan Williamson, Georgetown University discussed the paper’s findings and its implications for future tax policy.
Dharmapala explained, “the Homeland Investment Act was enacted in 2004 as part of the American Job Creation Act. The HIA’s purpose was to increase investment and employment in the U.S. He also noted the unemployment rate in October 2004 was 5.5 percent and the unemployment rate for March 2009 is 8.5 percent. He said “in February 2009 a similar measure was defeated by the Senate.” Dharmapala’s paper took two approaches when examining the tax holiday, data and empirical study. He said “I used confidential data on all U.S. MNC and foreign affiliates.” Dharmapala’s study of the tax holiday found there was no increase in domestic investment or employment by firms that repatriated under HIA. He said “there was no significant change in investment or employment and firms that repatriated under HIA increased payouts to firms.”
So what did firms do with the money? Dharmapala said “there was approximately one dollar increase in payout to shareholders from one dollar of repatriation under the HIA.” He believes “the HIA induced firms to repatriate large sums of money and firms paid out the repatriated funds to shareholders.” Dharmapala listed three warnings for the tax holiday; congressional intent, financial conditions and gains to firms and shareholders. He said “the outcome is consistent with “true” congressional intent.” He also said Congress rejected the Breaux amendment and noted that his results didn’t suggest that firms violated the provisions of HIA in any way. Dharmapala said “firms were not financially constrained in 2005 and for shareholders, the HIA led to a change in timing of payout.”
Williamson believes the results suggested firms would have made investments if financially constrained and argued that it depended on the investment opportunity set. He questioned, how should firms treat taxes as they relate to investment strategy? He continued “are foreign taxes and repatriation taxes any different from other taxes? He said “Dharmapala’s analysis assumes all firms are constrained.” He then questioned “does HIA work?” Williamson recommended clearly defining the limits for these firms and focusing on firms that are really financially constrained using various methods.
Brill said “there are three principle arguments, how could this not be positive? Are you stupid? and what are the legal views? On his first argument Brill said “this is 300 billion dollars and how could it not move the needle? On his second argument Brill questioned, how will it have a real economic benefit? He said “lots of things are done to tax codes that don’t move the needle and if the tax holiday wasn’t beneficial enough to pursue it wouldn’t have been included.” To expand on his last argument he said “this wasn’t the first temporary tax policy.” Brill said there were other temporary taxes gong on at that time and this wasn’t a unique tax. He said “the paper doesn’t tell us it wasn’t positive for the economy but suggests that firms are well governed.”
When asked how the HIA would affect the current economic crisis, Williamson said “I would be surprised if it would be any more effective now than it was then.” Brill said “timing is everything and timing is important in fiscal policy.”
Actually, since all money goes somewhere and half the public has shares in the stock market, given past performances, the likelihood that tax breaks led to job-generating activity is a high one even if the employment gains in those specific industries and businesses don’t materialize.