The debate on the increase of the national debt ceiling is clearly taking center stage and correctly so since it would impact our country in ways no one can predict.
On the horizon, however, loom two very large international trade and taxation issues which will impact Connecticut companies and jobs: approval of several trade agreements and a tentative proposal to offer a tax holidays to companies which repatriate foreign earnings. I would urge our congressional delegation to support the agreements but to oppose the tax holiday.
Soon Congress will be asked to ratify trade agreements with Colombia, Panama and South Korea. These agreements have been reached after several years of negotiations and represent the effort of several administrations. No one disputes that these agreements will benefit our exporters by opening markets heretofore closed thus resulting in thousands of much needed jobs. For Connecticut, the free trade agreement with Korea is estimated to generate 1,200 with the aerospace industry being the main beneficiary.
Yet somehow these beneficial agreements have been languishing as a result of Democratic and Republican political considerations. The last and main point of discord? Democrats insist that funds be allocated within the agreements to fund Trade Adjustment Assistance Program.
TAA was established under the Trade Act of 1974 and the program’s goal is to offer assistance to eligible workers who are adversely affected by trade. Available assistance includes job training, Trade Readjustment Allowances, job search, relocation, and other services concerning re-employment.
The program, heavily favored by organized labor, is based on the principle that as the U.S. pursues trade policies that benefit the economy as a whole, we must also help the special adjustment problems of individuals adversely affected by increased competition from abroad.
The evidence appears to suggest that the program is marginally effective at best and redundant at worse. Critics point out that TAA duplicates the unemployment and training programs already offered; the percentage of employees actually covered over the past many years is very small and no data exists to show how effective the program has been. One study examined 3,245,034 workers who were laid off and filed for unemployment insurance from 1997 through 1999: only 2.1 percent lost their jobs due to import competition or overseas relocation
I fail to see the logic of not approving trade deals which clearly will create thousands of jobs because of this assistance issue. We need jobs and we need them now and nothing should stand in the way of this goal.
The second issue which is being hotly debated centers around the wisdom of a one-time lowering of our tax rates on foreign earnings so as to allow U.S. corporations to bring back billions of dollars currently kept overseas.
U.S.-based corporations do their best to minimize the tax bite and those with foreign subsidiaries generally pay no U.S. corporate taxes on their foreign income until it is “repatriated,” i.e. sent back to the parent company. Currently it is estimated that in excess of $500 billion in funds may be held overseas.
A number of executives are recommending a tax holiday whereby profits brought back into the U.S. would be taxed at a 5 percent rate as opposed to the normal 35 percent corporate income tax rate. They point to a number of benefits: increased short-term tax revenues and potential for companies to make more investments and therefore create jobs.
In 2004, as part of the American Jobs Creation Act, Congress enacted a one-time “dividend repatriation tax holiday” that allowed firms to bring overseas profits back to the United States at the reduced tax rate of just 3.7 percent. The tax holiday waswwsuccessful at inducing large multinational corporations to repatriate their earnings: $362 billion were repatriated under the holiday.
So what did corporations do with their money? Study after study has shown that firms overwhelmingly used these earnings not for productive new investments or jobs: they increased shares buyback, increased dividends, increased compensation. The Congressional Research Service reported that the “studies generally conclude that the reduction in the tax rate on repatriated earnings… did not increase domestic investment or employment.”
But there are two additional factors to consider:
According to the Federal Reserve, U.S. non-financial companies now have $1.9 trillion in liquid assets. It does not appear that they need more cash for investments.
The tax holiday would encourage corporations to find ways to park more earnings overseas on the expectation that another tax holiday down the road will provide a better opportunity for repatriation.
This approach has been tried before; it failed to produce the desired result and should not be reintroduced.
Paul Pirrotta is president of Paul Pirrotta International in Glastonbury. He writes frequently on international trade issues. Reach him through the company’s website at: http://italy-usatraderep.com/aboutus.html
