Watch What I Do, Not What I Say

Mike Ouellette — Mon, 03 Aug 2009 14:40:48 +0000

The Homeland Investment Act of 2004 allowed a one-time tax break on repatriation of foreign earnings by U.S. multinationals, if the money was used for specified investments in the United States. The law specifically forbids companies from using the money for paying dividends and buying back shares. Firms responded to this law by repatriating about $300 billion from foreign affiliates and taking advantage of the tax break. But was the money used for investments in building plants or research and development – the purpose of the tax break? Not quite. About 92% of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends. In a report titled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” Dhammika Dharmapala, a law professor at the University of Illinois; C. Fritz Foley, an associate professor of finance at Harvard Business School; and Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology, said, “Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions.” However, since repatriations did happen and were used to pay shareholders, the report said shareholders may have reinvested them or used them for consumption. “Either of these activities could have an effect on U.S. growth, investment and employment,” said the report.

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Watch What I Do, Not What I Say