The last time companies got a break on overseas profits, it didn't work out well

Key Points
  • Congress in 2004 approved a repatriation tax holiday that brought back $312 billion in overseas profits.
  • Most of the money was used not for economic growth but to give cash back to shareholders.
Cohn: We are trying to stimulate business investment
Cohn: We are trying to stimulate business investment

The Trump administration wants to give companies a break on profits earned overseas and brought back to the United States — a program that's been tried before to little effect.

Current estimates put the total stockpile that U.S firms are holding abroad so as to avoid U.S. taxes at somewhere in the $2.5 trillion range. Back in 2004, Congress approved a plan to "repatriate" such overseas funds that companies could bring back home at a reduced rate.

The program was part of the American Jobs Creation Act. The hope then, as now, was that companies would shovel that money back into the economy in the form of investment and job creation.

It didn't quite work out that way.

Contrary to the intent, the benefits skewed toward a select few companies in a select few industries. Rather than use the money for hiring and capital purchases, companies plowed the cash into share buybacks and dividends, and many of the biggest beneficiaries actually cut American jobs in the years after the repatriation.

"While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment," the Congressional Research Service, Congress' nonpartisan think tank, said in a report.

The CRS cited a series of reports into the benefits of repatriation, with a common theme that the 2004 program was "an ineffective means of increasing economic growth."

How it worked last time around

In the 2004 case, 9,700 companies were eligible to take part in a tax holiday that would bring the overseas cash back at a rate of 5.25 percent, well below the 35 percent rate for profits earned abroad.

Of that group, 843 firms participated. They brought home $312 billion in qualified earnings, or about one-third of the total cash held overseas, according to the CRS. That translated into total deductions of $265 billion.

For certain industries and companies, the program worked out nicely.

A Pfizer technician as she works at Neusentis Ltd.'s research laboratory, a unit of Pfizer Inc., in Cambridge, U.K., on Thursday, Sept. 26, 2013.
Chris Ratcliffe | Bloomberg | Getty Images

Five companies — Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and IBM — accounted for 28 percent, or more than a quarter, of total repatriations. The top 15 tax holiday beneficiaries accounted for 52 percent of the total benefit.

Moreover, the pharmaceutical and medicine industry alone comprised 32 percent of the total, and combined with the computer and electronic equipment sector to make up fully one-half of the repatriated cash.

Jobs slashed

In the 2005-06 time frame, Pfizer, which repatriated $37 billion, slashed 10,000 jobs. Merck, which brought back $15.9 billion, cut 7,000 jobs, and HP pared its employment rolls by 14,500 after repatriating $14.5 billion.

Most of the money went to repairing balance sheets and rewarding shareholders, according to the CRS. According to one study cited, as much as 91 cents on the dollar went to share repurchases, even though that, along with compensation increases, was an expressly prohibited use by Congress.

Prohibited uses for the cash weren't easy to track as the money ended up being commingled with other corporate funds.

The CRS study said one of the biggest faults was that the permitted uses were "overly generous" and not "explicitly linked to specific uses."

Few details yet from White House

It's unclear whether the Trump administration will tie any strings to what is done with the repatriated cash.

When it unveiled the plan on Wednesday, the White House also did not specify what the repatriation rate will be.

"It will be a very competitive rate that will bring back trillions of dollars," Treasury Secretary Stephen Mnuchin said at a news conference Wednesday.

Mnuchin and chief Trump economic advisor Gary Cohn did stress that the tax holiday will be a one-time event.

If companies believe additional repatriation moves will come, they often are tempted to hold onto their cash in hopes of getting further breaks in the future.

In fact, the CRS report said overseas corporate profits actually swelled after the 2004 holiday.

"Simply put, the more the repatriated earnings are used to shore up a corporation's balance sheet or paid to shareholders, the less the stimulative effect of the repatriations," the report said.

Correction: In the 2005-06 time frame, Pfizer repatriated $37 billion. An earlier version misstated the figure.

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