Magazine article Newsweek

This Tax Break's Broken; the Jobs Creation Act Created an Enormous Loophole

Magazine article Newsweek

This Tax Break's Broken; the Jobs Creation Act Created an Enormous Loophole

Article excerpt

Byline: Allan Sloan

Congress's trying to control what corporate America does with its money is like asking a toddler to go one-on-one with Michael Jordan in his prime. It's no contest. Consider Congress's attempts to limit spending of a tax break it granted as part of the American Jobs Creation Act of 2004, the corporate-tax "reform" bill passed last fall. One of the key provisions gave a special one-time break to companies with overseas operations. This year, they'd be able to pay taxes at a bargain rate--5.25 percent rather than 35--if they repatriated profits to this country, rather than leaving them abroad. This would supposedly create all sorts of new jobs--more than half a million, according to some claims.

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 Congress wanted, like job training and research, but not for things that Congress considered unworthy, like dividends, stock buybacks, executive bonuses and paying taxes. 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. Spending, of course, that supposedly will create lots and lots of new jobs.

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 plans to spend $100 million to build a plant in the United States can bring in $100 million from its Swiss subsidiary and certify that this money will be used to build the plant. That frees up the other $100 million the company had planned to spend, and it can use that money for anything, be it paying dividends or giving the CEO an extra few million bucks. …

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