Paul L. Caron

Friday, December 10, 2010

Lobbying for Tax Benefits Yields 22,000% Return on Investment

Raquel Meyer Alexander (University of Kansas, School of Business), Stephen W. Mazza (University of Kansas, School of Law) & Susan Scholz (University of Kansas, Accounting and Information Systems Area) have published Measuring Rates of Return for Lobbying Expenditures: An Empirical Analysis Under the American Jobs Creation Act, 25 J.L. & Pol. 401 (2009). Here is the abstract:

The lobbying industry has experienced exponential growth within the past decade. The general public, the media, and special interest groups perceive lobbying to be a powerful mechanism affecting public policy. However, academic research finds inconclusive results when quantifying the rate of return on political lobbying expenditures. In this paper we use audited corporate tax disclosures relating to a tax holiday on repatriated earnings created by the American Jobs Creation Act of 2004 to examine the return on lobbying. We find firms lobbying for this provision have a return in excess of $220 for every $1 spent on lobbying, or 22,000%. Repatriating firms are more profitable overall, but surprisingly, profitability is not a predictor of repatriation amount. Rather, industry and firm size are most predictive of repatriation. Cash on hand, a proxy for ability to repatriate, is not associated with the repatriation decision or the repatriation amount. This paper provides compelling evidence that lobbying expenditures have a positive and significant return on investment.

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An interesting article. However, certain points hould be considered.

1. They examined lobbying costs re a successful effort. One must also consider lobbying costs of unsuccessful efforts. Otherwise, this is like calculating an ROI on only my successful wagers.

2. The one-time (?) dividend tax holiday produced VERY large gains for those companies that it benefitted.

3. I reviewed this proposal for a number of public companies. Unless a particular fact pattern existed, the dividend provided very limited benefits for major companies.

4. But those who benefitted, won big.

5. Those companies presumably knew they had a big overhang of a high residual US tax upon repatriation.

6. So, in the fact pattern selected, a relatively small group of companies could predict that lobbying was a high stakes effort and they won. This calls into question but does not invalidate the premise of the article.

Posted by: Ed D | Dec 10, 2010 10:14:43 AM