Corporate windfall

February 20, 2005

WHAT DO drug-maker Pfizer, technology-marketer Hewlett-Packard and consumer-products giant Procter & Gamble have in common?

Each of these corporate kings has billions of dollars in foreign profits parked overseas that it can bring back to the United States this year at a rock-bottom tax rate under the "American Jobs Creation Act of 2004." And with each, there have been reports of likely sizable layoffs.

So much for creating jobs - and for truth in tax-cutting.

By the time this act was passed last October, an orgy of Washington lobbying had turned it into an astonishing example of corporate pork, with $137 billion in business tax cuts over a decade - cuts for ceiling-fan importers, NASCAR track owners, architects, tobacco farmers and almost any entity claiming to be a manufacturer.

Also in the bill was a one-year provision allowing U.S. multinationals - which have accumulated an estimated $400 billion or more overseas protected from a 35 percent U.S. corporate tax rate - to repatriate that money subject to only a 5.25 percent tax rate.

To qualify for this tax cut, all the companies have to do is file a "domestic reinvestment plan" showing that within some sort of reasonable time frame they intend to spend an amount equivalent to the profits they bring back from overseas on hiring workers, capital investments, research, acquisitions, advertising or debt repayment.

Nothing in the law or subsequent U.S. Treasury guidance statements specifically requires that the repatriated profits have to be spent on job creation efforts. The funds do not even have to be applied to new initiatives. And once back in U.S. corporate accounts, the money does not have to be segregated - meaning it could be applied to normal expenses or investments, freeing up a like amount for just about any purpose.

So, under these too loosely written rules, Pfizer has the opportunity to bring back almost $30 billion in untaxed money parked overseas, even while there's talk of big cuts in its sales force. Much the same at troubled Hewlett-Packard, with almost $15 billion offshore and layoffs back home in the wind. And Procter can repatriate almost $11 billion to help pay for its purchase of the Gillette Co., an acquisition sure to cost thousands of jobs at the razor-maker.

In the short term, the anticipated one-year rush to take advantage of this tax bargain on overseas capital is expected to bring in almost $3 billion more in taxes. But after this year, the U.S. Treasury is expected to be a net loser. And of course, all this is taking place at a time when the American job market is more or less stagnant and corporate tax receipts as a share of the economy are at one of their lowest levels since World War II.

The real problem here is that in an era of rising global competition, this nation really needs tax polices that effectively spur job growth - not mere corporate windfalls.

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