Sunday, October 23, 2005

Beer Bash

The WSJ is reporting (subscription required) that:
Just as U.S. companies are repatriating huge sums from overseas under a special one-year tax break -- more than $200 billion and counting -- they are using more cash than ever to buy back their own stock.

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Companies say repatriation and buybacks are unrelated, and they have good reason to say so. Among the few things forbidden under the American Jobs Creation Act of 2004, which established the tax break, is using the money for buybacks. The same prohibition applies to dividends and executive pay.

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Cash is fungible and companies aren't required to isolate the profits brought back or pledge to spend more than they normally would on things like training or buying machinery. So even though the tax break was meant to encourage certain activities, above all hiring, it ultimately frees money to be used however a company sees fit.

Kimberly Clausing, an associate professor of economics at Reed College in Portland, Ore., who studies taxation of multinational corporations, likens it to a student getting $20 from a grandparent to buy schoolbooks. "You buy $20 in books, but it frees up your spending, so you probably spend it on beer," she says.
Of course, the repatriation coupled with the massive stock buy-backs will cause a temporary, one-time uptick in income tax revenues, reducing the predicted deficit. The Bush Administration will then point to this aberration as evidence that its tax cuts are generating additional revenue and reducing the deficit. In fact, the uptick will be caused by accelerated recognition of income, not the creation of additional income or wealth. And, over time, the increase will be offset in subsequent years by reduced amounts of taxable income and tax revenues.

I will link back to this post as soon as the first Bush apologist makes this predictable, but false, argument.

1 comment:

Anonymous said...

No need to throw in your politics on this - especially when your underlying premise is wrong. You just don't understand. The reason billions and billions are being repatriated is because those earnings were left offshore (with a very low effective tax rate attached) and, absent an amnesty like this or a dire need at the US level, would never have come back onshore to be taxed. Taking 5.25% of something is better than 35% of nothing. Your timing scenario just doesn't match reality. In fact, the way the statute is set up, people who did pay dividends back regularly were penalized. That will mean that in the future people will be even more reluctant to dividend back earnings.