A Story From Teaching

2011 October 12
by SJ Leeds

I want to tell you a quick story about my teaching.  Each semester, I normally give a midterm exam, a final exam and a project.  Students can turn in their project on either September 15th, October 15th, November 15th or December 15th.


Sometimes during the fall semester, somewhere around Thanksgiving, I feel charitable.  (It’s normally a fleeting emotion.)  I send out an email and I tell the students that if they haven’t already submitted the project on one of the prior due dates, they don’t need to do it.  All is forgiven.


Of course, after doing this a few times, I’ve noticed that behavior has changed.  No one submits their project in September, October or November.  Everyone waits…hoping for a reprieve.


This pretty much sums up my view on the repatriation of foreign income.  If we’re going to have an occasional tax holiday, I feel pretty confident that I know how any rational company will behave.


Below, you will see two interesting slides.  Both come from the United States Senate Permanent Subcommittee on Investigations’ report, “Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals.”  This report was released on Tuesday — here’s the link. This is actually the “Majority Staff Report” which means that it’s the Democrats’ argument against repatriation.  (There are five Democrats and four Republicans on the Subcommittee.)  We can all argue about the conclusions in the report (they assert that no jobs were created, money was used for share repurchases and executive compensation, etc.).  Those are difficult things to prove and that’s not my concern today.  I think that we can all agree that we have a completely dysfunctional tax system (regardless of whether you believe or don’t believe that we should have a tax holiday).


The first slide shows the amount of funds that the top 10 repatriating companies actually repatriated during the last tax holiday (most did this in 2005) and the amount of overseas income that they are holding right now.  Once a company gets used to an occasional tax holiday, they plan on receiving it again.  See below.



Next, you will see a slide that lists the seven firms that repatriated the most earnings during the last holiday.  Here’s what’s interesting…you’ll see that the vast majority of these earnings were repatriated from tax havens (including the Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Costa Rica, Hong Kong, Ireland, Luxembourg, Netherlands Antilles, Panama, Singapore and Switzerland).  In other words, earnings are being directed to low-tax countries (tax havens).  This is not where the money is actually earned.  This is what happens when we have a dysfunctional tax system.  See slide below.



Have a great weekend.

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