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A push to bring foreign profits home

By Michael A. Fletcher and Jia Lynn Yang
Saturday, September 25, 2010; A8

As policymakers desperately search for ways to give the sputtering economy a jolt without deepening the nation's budget deficit, some economists say an answer lies with the more than $1 trillion in U.S. corporate profits that reside overseas.

Advocates of repatriating that money say it could finance hundreds of thousands of new jobs, research and development and other investment that could lift the economy from the doldrums.

"It would certainly be in the economy's interest to bring this money home," said Robert J. Shapiro, a former undersecretary of commerce in the Clinton administration and chairman of Sonecon, an economic advisory firm.

But instead of being viewed as part of the solution for the nation's economic woes, the profits of U.S. companies held offshore continue to mostly serve as a flashpoint over the politically charged - and some say disingenuous - question of whether the tax code rewards corporations for "exporting" U.S. jobs.

Under federal tax law, U.S.-based multinational corporations are allowed to defer paying U.S. corporate taxes on profits made overseas as long as the profits are invested outside the United States. It is an option corporations often take and a big reason many of them pay taxes far lower than the nominal 35 percent corporate tax rate.

The massive sums of money held by corporations overseas have prompted calls for a temporary tax reduction to encourage corporations to bring more of the money home.

Former Service Employees International Union president Andrew L. Stern, now a senior research fellow at Georgetown University, has proposed that the government temporarily reduce taxes on repatriated corporate earnings, then use the tax revenue to fund an infrastructure bank. The proposal, he said, could generate at least 2.4 million jobs.

Congress enacted a tax holiday for corporate profits held overseas in 2004, lowering the rate for returned money to 5.25 percent. The measure raised the amount of repatriated foreign profits five-fold to nearly $300 billion. But rather than supporting job creation, a study found, much of the money went directly to shareholders - through increased dividends or expanded share buybacks.

Money for jobs

Still, some advocates think the idea is worth another try. "It was probably a success on its own terms," Shapiro said of the 2004 effort. "There are things we can do" to ensure that a tax holiday creates more jobs.

The amount of money U.S. firms make and keep offshore has led to repeated attempts by Obama and his allies in Congress to change how tax law treats multinationals. They say the tax code gives a competitive edge to companies that invest and create jobs overseas, as opposed to keeping them at home.

Next week, Senate Democrats plan to push a bill including a provision that would repeal tax deferral for firms that move operations from the United States to other countries and then import their products back home.

"Our tax policy should benefit working Americans, not stab them in the back," said Sen. Sherrod Brown (D-Ohio). Democrats estimate the bill's price tag at $720 million over 10 years.

Senate Majority Leader Harry M. Reid (D-Nev.) had sought to bring the measure to the floor Friday but was blocked by Minority Leader Mitch McConnell (R-Ky.). That set the stage for a Tuesday showdown when Democrats are set to try to override Republican opposition.

The moves by Democrats to go after more of the profits multinationals generate offshore is applauded by labor leaders, who see jobs moving overseas as one of the biggest barriers to maintaining middle-class prosperity.

"We should be rewarding companies for keeping good jobs at home," said Thea Lee, deputy chief of staff at the AFL-CIO. "It is a question of incentivizing the kind of behavior we want to see."

Obama has faced increased criticism that his administration is pursuing anti-business policies. This month, the administration unveiled a plan aimed at boosting the economic recovery by making permanent research tax credits that would be paid for by raising taxes on multinational firms. The proposal opened a new round in the fight between the White House and some of the country's largest companies over the taxes they pay on money earned abroad.

A splash effect

After an earlier proposal by Obama to extract more tax money from multinationals, Microsoft chief executive Steve Ballmer went so far as to say his company would move more jobs overseas if taxes on foreign profits were increased. About 40 percent of Microsoft's 88,000-person workforce is abroad.

"We're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.," Ballmer said in an interview with Bloomberg News.

Obama administration officials say they are trying to strike a balance between not discouraging U.S. firms from growing abroad while encouraging investment at home. They see their latest proposal as a better job creator than a tax holiday. It would allow firms to continue deferring taxes on profits earned overseas but block companies from deducting expenses associated with that income until it is brought back home.

Much of the business community has not signed on, however, because it objects to any changes that would raise taxes on multinationals. The companies argue that the U.S. corporate rate is higher than rates in other developed economies, which has to be offset by deductions to allow the firms to be globally competitive.

Many corporate executives and economists also argue that foreign profits strengthen companies and put them in a better position to grow in the United States.

"It is not at all clear that when firms expand abroad they contract at home," said Mihir Desai, a Harvard Business school professor who focuses on international finance. "If anything, you see the opposite: When they expand abroad they expand at home."

He said that although the notion that more investment abroad means less investment at home has "a very appealing logic, it does not accord with the facts."

fletcherm@washpost.com yangjl@washpost.com

Staff writer Shailagh Murray contributed to this report.

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