A TAX break intended to create thousands of American jobs from billions of dollars made abroad by US companies could end up in shareholders’ pockets, leading economists say.

A year after the Jobs Creation Act was signed into law by President Bush, an estimated $206 billion (£116 billion) earned overseas by US multinationals has returned to America to take advantage of a one-off reduction in the rate of corporation tax.

Normally, companies face a 35 per cent tax on dividends when they repatriate their profits. But the Act reduces the levy to just 5.25 per cent on the profits of foreign subsidiaries.

Many of the biggest returns of capital come from pharmaceutical companies with factories in jurisdictions with low corporate tax rates such as the Irish Republic. Pfizer, the drug maker, has announced plans to repatriate nearly $37 billion this year, while last week DuPont, the chemicals group, announced plans to bring $9.4 billion in overseas earnings into the US to be taxed.

The aim of the Act was to encourage the firms to create jobs by investing their profits in the US.

But there is growing evidence that companies are instead funnelling the tax break into debt reductions and share buybacks, to the benefit of shareholders. The law does not require the companies to prove that they are using the money to raise investment levels above their original plans.

Nicholas Bohnsack, of International Strategy and Investment, a US investment advisory group, said that firms had cut their debts and used the rest of the money on mergers and acquisitions, dividends, share repurchases and funding pension liabilities.

His research shows a sharp increase in share buybacks among companies in the Standard & Poor’s 500, from $85 billion in the first half of 2004 to $163 billion in the first half of 2005, which he said was largely a result of the legislation.

Kimberly Clausing, an economics professor at Reed College, Oregon, said: “Should (the profits repatriation) encourage US investment? Not really, because it hasn’t changed the attractiveness of doing business in the US rather than other countries.”

Companies could claim that they were investing in the US while actually using the money for other purposes, she said. “I say to my students, it’s just like if grandma sent you a cheque that was only to be used at the bookstore. You just take the money that you would have spent on books and you spend it on whatever you want. What grandma has effectively done is facilitated your spending on beer or pizza.”

She added that by setting a precedent for a tax amnesty, the new law might actually encourage companies to shelter their profits abroad until tax rates were cut again.

However, Mr Bohnsack said the Act would eventually boost employment. “To the extent that companies begin to increase capital spending, that’s what we believe will foster strength in the US in 2006, particularly in job creation,” he said.

Concerns over the tax break come as a panel of tax advisers is preparing to tell President Bush to cut tax breaks for the well-off.

The Advisory Panel on Federal Tax Reform was set up by Mr Bush in February to try to simplify the nation’s tortuous tax code.

Ahead of a full report next month, Connie Mack, the former senator who chairs the panel, called for current tax breaks for homeowners, such as the mortgage interest deduction, to be cut. He said they encouraged wealthier taxpayers to buy bigger houses but did nothing to help others to purchase homes.

That could set the panel on a collision course with the White House, which does not want to undermine home ownership.

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