The most absurd corporate tax giveaway of 2005.
Feeling flush because you're getting a nice tax refund this year? You're not
alone. Some of America's largest corporations—a virtual who's who of the
Fortune 100—have been reporting their own hefty tax windfalls,
thanks to an absurd provision of a law designed to create jobs.
IBM, for example, is banking a $2.8 billion refund—well, better to call
it a "tax savings"—because instead of paying the normal corporate
tax rate of 35 percent on $9.5 billion in profits it earned overseas, the company
paid only 5.25 percent. That's the magic of the American Jobs Creation Act,
a piece of legislation that passed with comfortable margins in both the House
and the Senate and was signed into law by President Bush just two weeks before
the 2004 elections.
The AJCA, which was pushed through during the last fit of panic about outsourcing,
was ostensibly designed to encourage companies to add jobs here. It gave a small
tax deduction to American manufacturers, and it offered a one-time tax holiday
in 2005 when corporations could repatriate their foreign income at a massively
reduced tax rate. This repatriation, the theory went, would encourage R &
D and capital investment in the United States, leading to new positions down
the road. But, like President Bush's creatively named Clear Skies initiative
and Healthy Forest Restoration Act, the American Jobs Creation Act has not lived
up to its title.
Take IBM. According to its annual report for 2005, the company added fewer
than 400 jobs worldwide last year to its workforce of 329,000 people. At the
same time, IBM shed 5 million square feet of space in the United States, making
it highly unlikely that any of those jobs were added in the U.S. Indeed, numerous
news reports, including this
Business Week article, put IBM's head count in India at close to 40,000
at the end of 2005, more than a fourfold increase over the 9,000 reported at
the end of 2003.
Analysts anticipate that American companies will have repatriated around $350
billion in 2005 as a result of the law. While it's hard to make a straight calculation
because of the vagaries of the tax code, that works out to a savings of roughly
$104 billion on corporate America's tax bill. At Pfizer, the pharmaceutical
giant that announced the single largest repatriation—$37 billion—the
one-time windfall works out to approximately $11 billion. That kind of tax savings
buys a lot of $600-an-hour lobbyists, though not, apparently, many scientists
and salespeople. In its annual report, Pfizer doesn't list employees by region.
But the company's total head count dropped to 106,000 at the end of 2005, about
8 percent fewer jobs than at the end of 2004.
"It basically gave money to corporations in return for corporate contributions,"
says Bob McIntyre, director of Citizens for Tax
Justice. As for the law's name, McIntyre says that Congress was "just
kidding." One of the few groups that believes the legislation has led to
the creation of jobs is the American
Shareholders Association, a spinoff of Americans
for Tax Reform, led by conservative activist Grover Norquist. In a report
last month, the American Shareholders Association said that stock buybacks,
dividends and mergers, and acquisitions were up sharply because of the legislation
and that this in turn had led to the creation of 500,000 high-paying jobs in
the United States.
Not so far. Some companies taking advantage of the generous tax break haven't
even tried to hide their layoffs. In January 2005, on the same day
it announced it was cutting 6 percent of its workforce, National Semiconductor
said that it was repatriating $500 million under the American Jobs Creation
Act. Colgate-Palmolive, which in December 2004 announced plans to cut more than
4,000 jobs, brought back $800 million in overseas profits last year. The Wall
Street Journal reported in December that the combination of repatriation
and job cuts prompted Amalgamated
Bank, which owns Colgate shares, to file a shareholder resolution arguing
that the company's brand and reputation would be damaged by such moves. Julie
Gozan, director of corporate governance for Amalgamated, said the resolution
was withdrawn before Colgate filed its proxy on March 31 because the company
agreed to provide more information to investors on the impact of the AJCA later
this year. But Gozan said that Amalgamated is considering similar resolutions
at several other companies where it owns stock.
In addition to lowering the tax rate, the AJCA required companies to rewrite
all sorts of employment contracts. Mike Melbinger, head of executive compensation
and employee benefits at Winston and Strawn, a large Chicago-based law firm,
estimated that the typical large company might have 30 employment contracts,
10 change-in-control agreements, and various severance plans, all of which had
to be changed as a result of the 2004 law. "It was a ton of work,"
says Melbinger. "As much as we like to get paid, it was terrible for the
So at least the American Jobs Creation Act benefited one group of American
workers: corporate lawyers.