Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Encore of corporate tax holiday unlikely to stimulate economy

20.04.2011
A repeat of a corporate tax holiday that found little success in stimulating the economy in 2005 is still a long-shot to jump-start a stagnant U.S. economy, says a University of Illinois expert in corporate and international taxation.

Dhammika Dharmapala, a professor of law at Illinois, says that while the idea of a tax holiday has found favor among some politicians and presidential hopefuls looking to jolt the country out of the financial doldrums, it would have little positive effect on economic growth.

"Ostensibly, the aim is to increase domestic investment and employment – that is, to induce firms to buy more machinery or hire more workers and the like," Dharmapala said. "However, the firms that repatriated money from abroad in 2005 tended not to increase domestic investment and employment levels. So to try the same thing again and expect a different result might be described as a triumph of hope over experience."

The 2005 tax holiday, which was a result of the American Job Creation Act of 2004, allowed firms to repatriate cash from abroad and pay only 5 percent in tax.

"The U.S. corporate tax rate is 35 percent, reduced by the amount of foreign tax a firm pays," Dharmapala said. "To pay only 5 percent tax creates a very large incentive for firms to bring cash back, and they responded by bringing back over $300 billion."

So what happened to all that repatriated cash?

"It resulted in the repurchase of shares, so that cash was returned to shareholders," Dharmapala said. "One could argue that it might be better to have that cash in the hands of shareholders than have it stay abroad, but it certainly didn't boost the economy. Most shareholders were probably not constrained in their consumption activities to begin with in 2005, so I wouldn't expect anything different this time around."

Since Congress didn't create any sort of tracing rules nor require incremental spending of the repatriated cash, Dharmapala says the tax holiday of 2005 became a textbook example of the fungible nature of money.

"If a firm was planning to spend $100 million on domestic investment, they could designate $100 million brought back from abroad as that money, which then frees up some other $100 million to repurchase shares," he said. "As long as the amount firms brought back doesn't exceed domestic investment, it's difficult to design a rule that could bypass that problem. Moreover, the laws that Congress passes about repatriation taxes cannot fundamentally affect the set of investment opportunities available to firms. Even if such measures are completely effective in their aims, they would create the problem of forcing firms to engage in unprofitable investments."

According to Dharmapala, the revived proposals for another tax holiday – even though the 2005 holiday was sold to legislators and the public as a one-time event – reflect ongoing concerns about high levels of unemployment and the perceived lack of investment by firms in the U.S.

"The problem is that we don't really know why firms aren't investing right now," he said. "By historical standards, firms are sitting on a lot of cash, so it's difficult to see why their investment behavior would change simply by giving them less costly access to their foreign cash."

Ironically, one of the unintended consequences of the 2005 tax holiday is that it may have actually increased the amount of foreign cash holding, Dharmapala said.

"It created the expectation that there would be future tax holidays," he said. "So firms started stockpiling cash abroad – in some cases, even more cash than they normally would have – all over again in anticipation of future tax holidays."

Although it's difficult to predict whether there is enough political momentum for another tax holiday, Dharmapala notes the potential trade-off between long-term tax reforms and short-term stimulus measures.

"Another short-term tax holiday may undermine these long-term goals," he said.

Phil Ciciora | EurekAlert!
Further information:
http://www.illinois.edu

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

7th International Conference on Crystalline Silicon Photovoltaics in Freiburg on April 3-5, 2017

03.04.2017 | Event News

 
Latest News

Link Discovered between Immune System, Brain Structure and Memory

26.04.2017 | Life Sciences

New survey hints at exotic origin for the Cold Spot

26.04.2017 | Physics and Astronomy

NASA examines newly formed Tropical Depression 3W in 3-D

26.04.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>