Will a Tax Break for Multinationals Create Jobs?

As the nation struggles with how to jump-start hiring, one former CEO told CNBC Wednesday that a tax holiday for profits made overseas by US-based multinationals could lead to job growth.

However, experts on repatriation of profits say such tax breaks only rarely create jobs and the substantial amount saved by corporations on taxes usually lands in the hands of investors or gets used for stock repurchases.

“I’d like to see us basically repatriate some manufacturing jobs and give tax credits on the basis of investments in incremental new property and plant and equipment as well as job creation and give them a scale of tax reduction in the process of doing it,” said Lawrence Bossidy, former chairman and CEO of the Honeywell

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[HON  Loading...      ()   ], which operates in 95 countries outside the US through 83 wholly-owned subsidiaries and 13 joint ventures.

“I’m convinced with 15 million unemployed people, you’d get people to work for a lot less money than they were making when those jobs went offshore in the last decade.”

Prior to heading Honeywell, Bossidy spent 34 years at General Electric

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[GE  Loading...      ()   ], CNBC's parent company, where he rose to the position of vice chairman.

Boston University law professor Daniel M. Berman, the director of the graduate tax program, disagreed with Bossidy. “I don’t think it’s [a tax holiday] a good idea,” he said. “I do think it’s a good idea to create jobs, but this is an extremely expensive and ineffective way to do it.”

About five years ago, US-based multinationals enjoyed a temporary tax break, under the IRS Code Section 965, when Congress approved the measure under a jobs act.

The law allowed corporations to pay taxes on their foreign profits, when repatriated, at a 5.25 percent rate, rather than 35 percent. The period covered one taxable year, beginning on or after the provision's enactment in October of 2004.

According to the Treasury Department’s guidance memo in June 2005 for the Repatriation of Foreign Earnings Under the American Jobs Creation Act, the repatriated funds could be used, although were not required to be, for hiring and training workers, infrastructure and capital investments and research and development.

“The repatriation holiday produced a windfall gain for companies with large amounts of accumulated earnings in low-tax countries,” wrote economist Martin A. Sullivan, and Lee A. Sheppard in an article analyzing the tax break's impact for Tax Analysts, a provider of tax information.

“Companies used the funds principally for share repurchases,” the article concluded.

At the height of the financial crisis, a similar tax break bill surfaced in Congress, but died, according to some observers, because legislators reasoned that it wouldn't help the economy, but would result in lost tax revenue.

“It’s [the tax holiday] is like book-fine amnesty at your local library,” added Sullivan. “In the short term, that’s a good thing, because they get the books back. But [like a tax break], it encourages everyone to wait for the holiday.” 

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