President Obama says he wants to stop giving “tax breaks” that encourage American companies to “ship jobs overseas.” Like a lot of protectionist rhetoric, it has a nice ring to it but doesn’t stand up to even basic scrutiny.
Obama refers to a tax-code provision that allows U.S. companies to defer the payment of some corporate income tax until their overseas profits are repatriated here. Most other industrialized countries don’t tax their firms’ overseas profits at all — perhaps because they’re too busy cutting tax rates to improve their competitiveness, or perhaps because they realize it’s actually counter-productive.
But rather than talk about why the president’s approach is wrong in theory, consider this example from today’s Wall Street Journal of a similar move Washington has already tried, and watched backfire:
Mr. Obama believes that by increasing the U.S. tax on overseas profits, some companies may be less likely to invest abroad in the first place. In some cases that will be true. But the more frequent result will be that U.S. companies lose business to foreign rivals, U.S. firms are bought by tax-advantaged foreign companies, and some U.S. multinational firms move their headquarters overseas. They can move to Ireland (where the corporate tax rate is 12.5%) or Germany or Taiwan, or dozens of countries with less hostile tax climates.
We know this will happen because we’ve seen it before. The 1986 tax reform abolished deferral of foreign shipping income earned by U.S. controlled firms. No other country taxed foreign shipping income. Did this lead to more business for U.S. shippers? Precisely the opposite.
According to a 2007 study in Tax Notes by former Joint Committee on Taxation director Ken Kies, “Over the 1985-2004 period, the U.S.-flag fleet declined from 737 to 412 vessels, causing U.S.-flag shipping capacity, measured in deadweight tonnage, to drop by more than 50%.”
Mr. Kies explains that “much of the decline was attributable to the acquisition of U.S.-based shipping companies by foreign competitors not subject to tax on their shipping income.” Mr. Kies concludes that the experiment was “a real disaster for U.S. shipping” and that the debate over whether U.S. companies can compete in a global market facing much higher tax rates than their competitors was answered “with a vengeance.”
Now the White House wants to repeat this experience with all U.S. companies. Two industries that would be most harmed would be financial services and technology, and their emphasis on human capital makes them especially able to pack up and move their operations abroad. CEO Steve Ballmer has warned that if the President’s plan is enacted, Microsoft would move facilities and jobs out of the U.S.
Some of our politicians can keep trying to deny the globally competitive nature of business today, but it won’t do us any good.