Congress trying to control what corporate America does with its money is like a toddler trying to go one-on-one with Michael Jordan in his prime. It's no contest.
Consider Congress's attempts to direct how companies spend a huge tax break it granted last fall under the corporate tax "reform" bill known officially as the American Jobs Creation Act. You may remember this piece of legislation, which started out as a repeal of $5 billion a year in export subsidies that the World Trade Organization had ruled improper, but morphed into a massive special-interest giveaway.
One of the key provisions of this absurdly named legislation gave a special one-time break to U.S. companies with overseas operations. This year only, these companies would be able to pay taxes at a bargain rate -- 5.25 percent rather than 35 percent -- if they repatriated their retained foreign profits to this country, rather than leaving them abroad. This would supposedly create all sorts of new jobs -- more than a half-million, according to some claims.
This being Congress, legislators decided to posture, claiming that this break, which had been on some corporate wish lists for years, would be applied only to job-creating activities. It wouldn't be used to give chief executives more money or to increase dividends to shareholders.
Yeah, right. The Treasury Department, charged with transforming congressional language into real-world rules, recently released 39 pages of regulations to make sure the repatriated money would be used for things that Congress wanted -- like job training and research -- but not for things that Congress disfavored -- such as executive bonuses, dividends and stock buybacks.
Executives and boards of directors must pledge on their sacred honor that the company has a "domestic reinvestment plan" to use the tax-advantaged money only for permissible spending.
All this attempt at regulation certainly sounds impressive. But it seems to be about as effective as trying to eat soup with a fork. Why? Because money is what economists call "fungible." One dollar is like any other dollar.
A corporation that already plans to spend $100 million to build a plant in the United States can bring in $100 million from its Swiss subsidiary and certify, perfectly honestly, that this money will be used to build the plant. But the Swiss money frees up the $100 million of U.S. money that the company had planned to spend, and that newly freed U.S. money can be used for anything, be it buying back its own stock or giving a few million extra bucks to the chief executive.
"Since permissible uses include things that a company is already planning to do, it can legitimately spend repatriated money on these items,'' says Greg Kelly, a Washington-based public policy analyst with Susquehanna Financial Group. "At the end of the day, though, it will have additional money to spend for whatever it wants."
A Treasury fact sheet accompanying the regulations seems to make the same point: The government can't effectively micromanage companies' finances.
The fact sheet poses the question, "Are companies required to use the exact funds they repatriate to make the required U.S. investment?" The answer: "No, companies are not required to trace or segregate the repatriated funds. Companies simply must demonstrate that an amount equal to the amount of repatriated funds is invested under the domestic reinvestment plan." Seems pretty clear to me.
We're talking about major money affected by this legislation. Pfizer says it may bring up to $29 billion into the United States under this provision; Johnson & Johnson, about $11 billion; Eli Lilly, $8 billion to $9 billion.
These are huge companies that already spend heavily on the types of things permitted by this legislation -- you have to spend this kind of money to be a world-class pharmaceutical company. This way, the companies will end up a combined $50 billion or so ahead of the game, and can use their extra cash pretty much any way they choose. There's no chance that these companies will boost spending by a combined $50 billion this year for a one-time-only surge, then revert to normal levels in 2006. That's not how the world works. (I ran my thesis past spokesmen for these companies, none of whom would comment.)
Kelly of Susquehanna Financial estimates that companies will bring home $240 billion to $320 billion of tax-advantaged foreign profits this year. How much extra job-creating spending will this stimulate, above what would have happened anyway? No one knows.
One thing's certain, though. This legislation will produce plenty of work for lawyers and bean counters and assorted other paper shufflers. Which are probably not the types of jobs that Congress had in mind.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.