I’m not keen on many taxes to begin with, but as a practical matter, some are more destructive than others. Some are so bad that they’re a train wreck even by their proponents’ stated standards.
President Obama has proposed a package of tax hikes on the overseas operations of American firms. The supposed benefits sound like political winners: over the next decade the feds get $210 billion to shovel into the yawning budget hole, and at the same time discourage those companies from outsourcing jobs. Congressmen who promise more jobs but are wary of mounting deficits might think they’re hitting two birds with one stone.
But there are more appetizing birds than the goose that laid the golden egg.
See, there are just a few things that offer relief from the fact that the US is one of the few countries to tax its companies’ operations all over the globe. One is “deferral” – companies don’t pay taxes on most earnings until the money is returned to the US parent company, so they can delay getting slapped with the double tax by reinvesting their foreign earnings in foreign operations.
Another big relief is being able to claim credits on the taxes they pay to foreign governments.
Obama is proposing, among other things, to place new limits on deferral and clamp down on tax credits. These changes won’t work as advertised: they won’t reduce outsourcing (they may increase it) and won’t raise nearly as much revenue as originally claimed.
First, most American companies that expand overseas do it to get around trade barriers and get close to their customers. When a new KFC opens up in China, that’s not an outsourced American job; that’s an American business getting to expand into a growing market. The vast majority of sales made by foreign affiliates – think 90 to 94 percent – were to foreigners, not exports back to the US.
Second, the roughly 2,200 US-based corporations with overseas operations either employ or support the employment of 22 million Americans, and those companies create half of all American exports. Jobs here rely on providing direction to foreign workers (managers, engineers) and producing goods for affiliates to sell in foreign markets.
The growth of US foreign affiliates is “consistently accompanied” (PDF) by the growth of their parent companies, the opposite of what you would expect from a zero-sum perspective on “outsourcing”. More expansion abroad means more jobs, compensation and investment at home.
So making American firms uncompetitive abroad not only threatens jobs at home but even encourages businesses to headquarter themselves outside the US.
And as a result of that, the policy changes won’t raise nearly as much revenue as Obama claimed.
- The global downturn has been worse than Obama suspected back when that $210 billion figure was calculated.
- We’ve tried cutting back deferral before: in 1986, the government repealed deferral for the shipping industry, and consequently we lost half of our shipping capacity, taking a bunch of jobs and tax revenues with it.
- Even still, never underestimate the creativity and industriousness of tax lawyers.
That last part might not be such a problem if Obama’s proposals simplified the tax code, like he claims. But they make things worse on that score, not better.
As a note to my fellow Virginians: these companies with overseas operations are responsible for over half of the private sector jobs in the commonwealth (PDF source), and they tend to be the better-paying jobs (averaging over $70k compensation) like computer systems design and telecommunications. Is that going to sit well with the likes of Sen. Warner?
Bills that hurt this many people are loaded with political liabilities, yet I got word a few days ago that a bill with Obama’s proposals may come up for consideration in the House in September.
Get the word out. The more people know what this is going to cost them, the harder it will be to sell. By all rights, Obama’s Globo-Hike should fail politically before it has a chance to fail as policy.