October 13, 2011 – WASHINGTON (Reuters) - An overseas corporate profit repatriation tax holiday could boost consumption and U.S. tax revenues even if companies decide to return cash to shareholders, according to a new study published on Thursday.
The report, from the nonpartisan New America Foundation and co-authored by Laura D'Andrea Tyson, an economic adviser to President Bill Clinton, is the latest in a series of analyses judging the pros and cons of the corporate tax break.
A repatriation holiday would allow companies to bring offshore profits back to the U.S. at a tax rate much lower than the statutory 35 percent corporate income tax.
The growing list of competing studies pits businesses with large pools of profits abroad against detractors who worry a repatriation holiday will encourage companies to hold profits overseas until the political winds shift in their favor.
In 2004-2005, corporations had a repatriation holiday allowing them to return profits to the U.S. at a 5.25 percent tax rate. Analysts studying this tax break generally agree that proceeds were used by companies to buy back shares and that the holiday ultimately cost more than it collected in tax revenue.
The New America Foundation study said firms that will spend their repatriated cash face two choices: spend it internally or return it to shareholders.
Both choices will grow the economy, the report said. In all, the spending could increase gross domestic product by $178 billion to $336 billion and will add 1.3 million to 2.5 million jobs, the report estimates.
When companies return cash to shareholders, it will likely be wealthy Americans who will benefit and start spending, the report said. About $581 billion in after-tax dividends will be distributed to U.S. shareholders.
"Based on the distribution in equity holdings among U.S. shareholders, this consumption will be skewed toward higher income U.S. households, but it will nonetheless stimulate aggregate demand," the authors said.
Tax revenues generated from repatriated cash could be used to finance job creation measures "such as the creation of an infrastructure bank," like the one proposed by President Barack Obama in his jobs bill, the report said.
Democratic Senator Kay Hagan applauded the study on Thursday in a statement.
Hagan has sponsored a bill with Republican Senator John McCain that would tax at 8.75 percent corporate profits returned to the U.S. Firms could reduce the tax rate to 5.25 percent if they expand their U.S. payrolls by 10 percent in 2012. Businesses would face a $75,000 fine for every job cut during the holiday period, under the Hagan-McCain bill.
(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and Tim Dobbyn)