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Foreign earnings tax break could add 2.9 million jobs, study says [Updated]

September 7, 2011 |  9:44 am

Cisco CEO John Chambers
A huge one-time tax break to lure back some of the approximately $1.4 trillion in earnings held abroad by U.S. companies would produce nearly 3 million jobs over two years, according to a study released Wednesday by the U.S. Chamber of Commerce.

A so-called repatriation tax break, which would temporarily reduce the tax rate on foreign earnings to 5.25% from 35%, has been pushed by the chamber and major U.S. corporations, including Cisco Systems and Oracle Corp. Many Republicans support the move, as do some Democrats, and President Obama could include such a proposal in the $300-billion jobs package he will announce Thursday.

[Updated at 10:40 a.m. Sept. 7: Despite the bipartisan support, a spokeswoman for Treasury Secretary Timothy F. Geithner reiterated the administration's opposition to a repatriation break that is not part of broader corporate tax reform.]

The chamber study, prepared by conservative economist Douglas Holtz-Eakin, said the break would encourage companies to bring money back to the U.S. at the lower rate, boosting the economy and hiring. Holtz-Eakin, a former top economic advisor to President George W. Bush, estimated the move would increase the nation's total economic output by $360 billion over two years and would add 2.9 million new jobs -- all for much less cost than another government stimulus program.

According to an estimate this year by the Joint Committee on Taxation, a repatriation break would lure $700 billion in foreign earnings back to the U.S., $500 million more than would come back over the next 10 years. The federal government would lose about $80 billion in higher tax revenue in that case.

But compared to the $825-billion stimulus program enacted in 2009, the economic boost created by repatriation would be cheap, the chamber study said.

"Repatriation can be thought of as a private-sector approach to stimulus ... cash flows would become available for hiring, real purchases of investment goods, and research and development," the study said. "These cash flows would put resources in the hands of families and other companies."

U.S.-based multinational companies, particularly many large technology firms, said the high corporate tax rate forces them to park foreign earnings abroad. No taxes are due on that money until it is brought back to the United States. The study notes that as foreign sales increase, so does the amount of money held overseas, with foreign operation of U.S. companies producing about 24% of their profits -- up from  14% in the 1990s.

Many liberals criticize repatriation breaks, arguing they only encourage companies to hold more money abroad to wait for another tax holiday. They argue that a similar break in 2004 didn't create the promised jobs as companies used the money to pay down debt, make purchases or passed it on to shareholders.

A Treasury official in March cited that criticism in saying repatriation should only be part of a broader overhaul of the tax code. But Obama administration officials might be changing their view as they search for economic stimulus proposals that could pass the Republican-controlled House.

Holtz-Eakin acknowledges that studies of the 2004 tax break have shown widely different effects, ranging from 2.14 million jobs saved or created to none at all. But he said the return of the money would pump cash into the struggling economy.

"Cash that is trapped abroad in foreign-denominated assets benefits the U.S. economy when it returns, regardless of how firms choose to spend it," he said.


Bipartisan support builds for slicing corporate tax rate

Obama jobs plan to include $300 billion in tax credits, spending

Treasury dismisses idea of tax holiday for foreign profits unless it's part of broader reform

-- Jim Puzzanghera

Photo: Cisco Systems Chief Executive John Chambers, who has been a major supporter of a tax break on foreign earnings. Credit: Getty Images.