Thursday, July 9, 2009

Do As I Say Not As I Do

It was called the "Homeland Investment Act". Could there be anything more

popular than investing in our home land? Can't you see every member of Congress

proudly standing and proclaiming their support for investing in our great home land?

You might as well have called it the Puppies and Kittens and Apple Pie and Cute Kids Act

of 2004. According to Floyd Norris of the New York Times, the idea was quite simple.

International companies were given a one-time large tax break on overseas profits. The

promise was that this money would be used to encourage investment in this country.

New plants would be built and jobs created. These companies promised to do more

research and development. Instead of being taxed at the 35% rate, normal for corporate

profits, this act would chop the rate to around 5%for profit brought back and invested

in the "Homeland". Oh, by the way, the language of the law said that the money could not

be used to raise stock dividends or repurchase shares. So far, so good, right? The

companies get a tax break and the "Homeland" gets much needed investment. How

could you vote against this? What kind of grinch or cynical nay-sayer would you have

to be to oppose such a simple and appealing plan?

As expected, with the help of the Bush Administration, the Act passed and some

$300 billion of overseas profits were brought back from foreign subsidiaries. Now,

three professors have examined what actually happened to the money and "surprise,

surprise", their analysis shows that over 90% of the profits repatriated were used to buy

back shares and increase shareholders dividends. This, of course, was what was precisely

prohibited by the language of the bill.

The study, given the great title of "Watch What I Do, Not What I Say: The

Unintended Consequences of the Homeland Investment Act", chronicles what was done

with the money. The study concludes there is no evidence that any of the companies

used he money for what they promised they would when they lobbied Congress to pass

this patriotic piece of legislative legerdemain. There was no increase in investment in

this country, no increase in research and development, no increase in jobs, and no increase

in new plants or facilities. The unbelievable part, if this isn't enough already, is that the

very companies who lobbied for this corporate tax giveaway failed to live up to any of the

promises they made about what they would do with the money. The United States

treasury lost over $100 billion in tax revenues (that's you and me, by the way, and we

have to pay more in taxes to make up for that loss), and we got zip, zilch, nada for this

generous little gift to corporate America.

The report concludes that "the restrictions placed on how the money was to be

used were completely ineffective". The authors cite the case of Dell Computer. Dell had

pushed hard for the law, and promised that they would build a new plant in Winston-Salem,

North Carolina. They brought back into the country some $4 billion in profits and spent

$100 million on the plant. Sounds perfect, right? This is just how it was supposed to work.

However, the study shows that Dell admitted the plant would have been built anyway. Oh,

and a short time later, the company used $2 billion for a share buy back, precisely what

the law supposedly prohibited them from doing.

If your temperature is not rising yet, this gets even better. Remember, the

companies get a tax gift in return for bringing money home and investing it here. The

study concludes that many companies got the tax break, but never returned any money

to the U.S. They knew the law was coming, so they increased foreign investment (took the

money out of this country and invested it somewhere else); and then when the law passed,

they claimed the profits and got the tax break without reducing foreign investment or

using the money to benefit Americans in this country. The study called it "round tripping".

It does not appear that anyone broke any laws in all of this. (How that is

possible I have no idea, since the language of the law was so clear.) The reason appears

to be that companies were able to move money around so as to take advantage of the tax

break on the one hand, and then use different money, freed up by the nice little gift from

Congress, to buy back shares and for other purposes the law prohibited.

Oh, and to add insult to injury, the study authors throw in a little trickle-down

economics. While concluding that this law was a gift for corporate America that cost you

and I billions of tax dollars, while not doing any of the things that would benefit us; the

authors do offer an up note by concluding that many of these billions went to share holders

who must have spent some of that "found" money, and trickled down some of it into the

economy which benefitted us in some way.

Just a few weeks ago, President Obama made a modest proposal to close some

of these foreign tax loopholes which encourage companies to spend their money in other

nations instead of here. He claimed this has resulted in job losses and a reduction in

investment in our "Homeland". You would have thought he had nationalized the means

of production from the howls coming from the business world. Business spokespeople

attacked the President. They claimed that closing the loopholes would hurt the ability of

businesses to compete overseas and will cost jobs in this country. The president of

Microsoft threatened to immediately move jobs overseas if the President attempted to

close any of these tax gifts to corporate America.

The next time you hear corporate America talking about jobs and puppies and

kittens and investing in the "Homeland" to benefit all Americans, please remember that

what they say and what they do bear no resemblance to each other. What do you think?

I welcome your comments and rebuttals. Please send them to

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