Raise taxes on foreign income, ship more jobs overseas

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.

191 comments Add your comment

HDB

September 27th, 2010
12:15 pm

Methinks if you close the loopholes….then drop the tax rate….that would solve the problem!! What say you, Kyle??

Don't Forget

September 27th, 2010
12:15 pm

Kyle, I disagree. Germany has a similar policy and is the #2 exporter in the world, surpassing the US despite having a population only slightly more than a quarter of the US. Companies should not recieve tax incentives to send jobs overseas.

Tommy Maddox

September 27th, 2010
12:19 pm

Let’s see: it costs $50.00 to have a UAW guy over here install a seat in an automobile; it costs $7.00 to have it installed by a non-union buy in Europe. I’m moving some business to Europe.

Overtax me while there? Then I’ll just pull up and move it all over and not “repatriate” my earnings.

CAIR Bears

September 27th, 2010
12:22 pm

No one listens to Obama. He’s lost all of his credibility and his own voting bloc has left him.

Not So Casual Observer

September 27th, 2010
12:22 pm

The current Administration has acted contrary to the lessons of history with most every policy decision, whether domestic or foreign. To assume this POTUS and his cohorts wish the best for the United States would be a mistake.

The decisions and policy to this point indicate a POTUS who wishes to diminish the position of the US in the world and continue to create financial havoc for the citizens. When those in the lowest tax brackets begin to create the jobs in this country is the only time we should tax the rich more and those seeking employment less.

If the Administration truly wished for prosperity in the US there would be lower taxes levied upon those who have the ability to create jobs by the thousands. Unfortunately this Aministration, like all good Leftists, believes government can create jobs and prosperity despite 2 centuries of evidence to the contrary. This Administration wishes to confiscate our money and have more “Stimulus” where a city like Los Angeles spends millions of dollars to create ONE job.

A national or international corporation would create dozens of jobs with the same money the Administration spends to create ONE. Yet, here we have all the Leftists still supporting a failed Administration and a failed Congressional leadership.

The voters MUST force the major political parties to change the manner in which they govern.

Jefferson

September 27th, 2010
12:27 pm

Tommy take off, you sound like a frenchy.

carlosgvv

September 27th, 2010
12:29 pm

We have the best congress money can buy. So, don’t expect them or the President to make any real moves toward keeping jobs here in America. Remember, money talks.

CAIR Bears

September 27th, 2010
12:34 pm

I see ole Bookman has yet another “bash Fox” column for the left wingers to rant about.

Gotta suck to be a liberal these days.

Left wing management

September 27th, 2010
12:49 pm

CAIR Bears: What’s a ‘liberal’ ?

Road Scholar

September 27th, 2010
12:56 pm

Heck let’s just drop all taxes. Then we can have prosperity for all according to conservatives, although we won’t have a country. That way the rich can buy whatever they want.

TINSTAAFL

September 27th, 2010
1:02 pm

Road Scholar

Isn’t it a little early to be making straw men? It’s not even October yet.

CJ

September 27th, 2010
1:05 pm

The WSJ continues to compare apples with oranges when giving examples of statutory corporate tax rates. They should be focusing on effective corporate tax rates (percentage of profits actually paid in taxes after deductions and credits are applied). Despite our relatively high statutory corporate rates, U.S. effective tax rates are relatively low by OECD standards. That said, I’d support simplifying the corporate tax code such that we have lower statutory rates along with fewer deductions and credits.

By the way, it’s worth pointing out that this editorial overgeneralizes (again) with the implication that taxes are the only factor that comes into play when business is deciding where to locate their operations. In fact, worker skills, educational systems, physical infrastructure, and local economic factors (Ireland isn’t doing so well) are just some of the other factors considered.

HDB

September 27th, 2010
1:10 pm

Tommy Maddox September 27th, 2010
12:19 pm
“Let’s see: it costs $50.00 to have a UAW guy over here install a seat in an automobile; it costs $7.00 to have it installed by a non-union buy in Europe. I’m moving some business to Europe.”

Are you taking into accout a 63% tax rate in Denmark….social taxes of 21% in France…..a 45% marginal tax rate accompanied by a 15% public health tax rate in Germany?? You’re paying a HIGHER tax rate in Europe than you would be in the US……

Think again!!!

CAIR Bears

September 27th, 2010
1:10 pm

“CAIR Bears: What’s a ‘liberal’ ?”

An Obama cult follower.

Kyle Wingfield

September 27th, 2010
1:11 pm

CJ: The editorial includes this paragraph:

“A May 2010 study by University of Calgary economists Duanjie Chen and Jack Mintz for the Cato Institute using World Bank data finds that the effective combined U.S. federal and state tax rate on new capital investment, taking into account all credits and deductions, is 35%. The OECD average is 19.5% and the world average is 18%.”

And then this one:

“Paul Volcker led this handpicked White House tax reform panel whose recent report concluded that ‘The growing gap between the U.S. corporate tax rate and the corporate tax rates of most other countries generates incentives for U.S. corporations to shift their income and operations to foreign locations with lower corporate tax rates to avoid U.S. rates.’ ”

Now, it’s your turn to bash Cato and accuse Volcker of being a GOP plant in the White House…

CAIR Bears

September 27th, 2010
1:11 pm

“That way the rich can buy whatever they want.”

Democrat congressmen already buy what they want.

retiredds

September 27th, 2010
1:20 pm

And on the other hand,

On Thursday, House Republicans released their “Pledge to America,” supposedly outlining their policy agenda. In essence, what they say is, “Deficits are a terrible thing. Let’s make them much bigger.” The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which independent estimates say would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration’s tax proposals. (Paul Krugman, NY Times “Downhill With the GOP”

I know some will not like my quoting Krugman but the numbers he states are not that far off.

booger

September 27th, 2010
1:23 pm

This is simply a pre-election sound bite. The government knows they cannot enforce this type of program. I am retired, but worked for a large international company. This company had legal entities all over the world. It was a very simple matter to shift profits to an entity with lower tax rates, and bank the money internationally so that it was not brought into the US.

This may indeed hurt smaller companies who do not have the benefit of expert international tax and legal resources, but for most larger companies this will not be a blip on their screen.

Left wing management

September 27th, 2010
1:28 pm

CAIR Bear: “Liberal = An Obama cult follower”

Not much of a definition.

You seem to think you’re not much of a follower yourself?

F. Sinkwich

September 27th, 2010
1:29 pm

Not So nailed it.

Tax increases are just one arrow in the liberal quiver to grow government and punish achievers. Another arrow is onerous regulation, which has the beauty of being launched without the messiness of having to take a vote.

Don't Forget

September 27th, 2010
1:39 pm

Kyle, both CJ and Volker are correct. Around 2/3 of companies don’t pay any corporate taxes. If you can successfully lobby for loopholes for your industry your ok, if you aren’t that powerful your taxes are too high. Obama has said he is open to lowering the corporate tax rate if the losses in revenue can be offset by the closing of loopholes. Sounds like a great idea to me.

AmVet

September 27th, 2010
1:46 pm

Mr. Wingfield, I concur that it is fair to question this aim.

But as a relevant retort, why then do “fiscal conservatives” never, ever question the destructive effects of “export assistance programs” and other forms of contrived corporate welfare? (Which I would be happy to list in detail.)

Presuming that you and they agree that the wholesale export of American jobs and entire industries (Payroll processing, airline passenger billings, insurance computer applications, new software designs, among MANY others) overseas has had a devastating effect on working American families…

Fat Cats

September 27th, 2010
1:46 pm

There are maybe five people in the world who could discuss intelligently the effect of Obama’s overseas tax policy. What are the odds that all five ended up here on this comment board?

morons.

Don't Forget

September 27th, 2010
1:47 pm

BTW, I think Volcker is a straight shooter with integrity and am always interested in hearing what he has to say. He has advised every president since Nixon and played a major roll in the financial regulatory bill passed earlier this year.

Left wing management

September 27th, 2010
1:48 pm

“Tax increases are just one arrow in the liberal quiver to grow government and punish achievers. ”

What utter claptrap.

Sheez where does this stuff come from?

F. Sinkwich

September 27th, 2010
1:54 pm

“Sheez where does this stuff come from?”

Uh, ever hear of the Obama administration and its anti-business pro-government policies?

buck@gon

September 27th, 2010
1:55 pm

Obama and the Democrats seem to prefer foreign companies to American ones. The worst policy of the blundering Washington ruling class right now isn’t their tax hikes or their legislation (necessarily). Worst of all right now is the uncertainty.

“We have to pass this bill to know what’s in it.” –Nancy Pelosi

Small businesses (who employ 2/3 or American workers) aren’t yet aware how the hundreds of thousands of pages of regulations and interpretations of Obamacare are going to harm them, but there is enormous distrust of government regarding this. Also critical concerns are VAT taxes, Cap and Trade, class warfare rhetoric and verbal threats against people who supposedly don’t “pay their fair share.”

Why is it that 39.6% is fair and 35% isn’t?

Left wing management

September 27th, 2010
2:02 pm

Sinkwich: anti-business, pro-government policies?

What universe are you living in? Where did you get the idea that these two are locked in opposition and not part of a tightly-knit, balled-up, and reciprocal process? Good god even the Tea Partiers understand that much.

Where does this garbage come from!

AmVet

September 27th, 2010
2:02 pm

Obama received $25 million from contributions from Wall St. And for the first time in history he outraised his GOP opponent in corporate campaign contributions. And those guys ain’t dumb – they know who they can control and who they can’t.

As evidence, he voted for and supported the bailout of the aforementioned banksters and casino capitalists.

He supported a health-care reform that turned over authority back to the *private insurance companies*.

He increased the military presence in Afghanistan and Pakistan and Iran and the military bases in Iraq.

He oversaw the auto manufacturers bailout, which was designed to help these private companies, known as the Big 3, to survive as private institutions that sell their cars according to what customers will pay for them. Thus, its goal was to preserve an aspect of capitalism (the American share of the automobile market), not establish socialism

And yet, he’s a socialist.

Incredible…

CJ

September 27th, 2010
2:03 pm

…data finds that the effective combined U.S. federal and state tax rate on new capital investment,…

I believe we were talking about effective tax rates on all corporate profits. I’m not entirely how CATO arrived at these figures, but yes, they are cherry-picked. The U.S. effective corporate tax rate is below the OECD average.

As I said, I agree that the statutory rate needs to be lowered. Do you know Volker’s position on reducing the corporate credits/deductions so that the effective tax rate isn’t affected? The WSJ doesn’t say. It also doesn’t tell you that Volker supports an energy tax and VAT. In other words, Volker’s support for lowering the corporate statutory rates have context that the WSJ doesn’t bother to share with its readers.

buck@gon

September 27th, 2010
2:04 pm

AmVet,

See my post above… It is primarily uncertainty about the friendliness of government to business that the Democratics don’t understand and that businesses fear. “Export assistance programs”, “corporate welfare”? I think those are valid but trifling points, and they don’t address the 2/3 of Americans who work for small businesses.

The fact is that Democrats can help big business with special favors too, such as favorable government contracts and the items you mention above. No one can help small businesses because they aren’t capable of lobbying Washington for better treatment. The pretense of Dems all along has been that we need to ease the burden on the poor (via unemployment $ or free healthcare) so that they can spend money and help recover the economy “from the ground up.”

This idea just doesn’t work. The poor have already defaulted on their loans or lost their houses and jobs. They are still spending money at grocery stores, but they always have, government programs or no. Yes, republicans have provided favoritism to big corporations (as have democrats), but only republicans seem to understand the concept of allowing businesses to freely operate without overburdensome regulation and without profit prohibitions.

Left wing management

September 27th, 2010
2:04 pm

Kyle: “The growing gap between the U.S. corporate tax rate and the corporate tax rates of most other countries generates incentives for U.S. corporations to shift their income and operations to foreign locations with lower corporate tax rates to avoid U.S. rates.’ ”

Wait a minute, Kyle. I thought the rest of the world was a tide of over-taxation and creeping socialism that constantly threatened to overwhelm the world’s one remaining island of good republican virtue? So now you’re saying we actually OUGHT to be following the lead of such other taxation regimes as the EU?

My, seems like quite a switch.

Jefferson

September 27th, 2010
2:07 pm

Republicans are consumed by greed and money, they worship it like a religion. It always comes be to money with that crowd.

CAIR Bears

September 27th, 2010
2:09 pm

“You seem to think you’re not much of a follower yourself?”

Question fail.

AmVet

September 27th, 2010
2:10 pm

“Export assistance programs”, “corporate welfare”? I think those are valid but trifling points…

The federal government – in other words, you and me – subsidizes some of the biggest companies in America. Boeing, Xerox, IBM, Motorola, Dow Chemical, General Electric, and others have received hundreds of millions in taxpayer-funded benefits through programs like the Advanced Technology Program and the Export-Import Bank. In addition, the federal crop subsidy programs continue to fund the wealthiest farmers.

What do you suppose that total trifling amount is each and every year?

CAIR Bears

September 27th, 2010
2:11 pm

“And yet, he’s a socialist.”

Nah, he’s just an incompetent left winger who has absolutely no idea how the economy works.

CAIR Bears

September 27th, 2010
2:12 pm

“Republicans are consumed by greed and money, they worship it like a religion. ”

Guess you’ve never heard of John Kerry, John Edwards, Barney Frank, Charlie Rangel, Nancy Pelosi, Bill Clinton………………

Kyle Wingfield

September 27th, 2010
2:18 pm

AmVet @ 1:46: “why then do “fiscal conservatives” never, ever question the destructive effects of “export assistance programs” and other forms of contrived corporate welfare?”

I think your premise is incorrect, because many “fiscal conservatives” do question the destructive effects of corporate welfare. Unfortunately, Republicans have not followed through on our wishes and slashed those programs.

LWM @ 2:04: “I thought the rest of the world was a tide of over-taxation and creeping socialism that constantly threatened to overwhelm the world’s one remaining island of good republican virtue? So now you’re saying we actually OUGHT to be following the lead of such other taxation regimes as the EU?”

There are lots of different taxes and tax rates. I think I’ve been consistent on here in pointing out that Europe is better than us on corporate income taxes, without suggesting that we adopt the rest of Europe’s tax policies.

Jefferson @ 2:07: What do you call Democrats’ worship of other people’s money?

CAIR Bears

September 27th, 2010
2:20 pm

“I think your premise is incorrect”

Incorrect is what BedWet is all about.

AmVet

September 27th, 2010
2:25 pm

“I think your premise is incorrect, because many “fiscal conservatives” do question the destructive effects of corporate welfare.”

Then there must be a plethora of salient quotes and calls for the end of these giveaways, no?

Would you help me out on this Kyle, as seriously I cannot seem to find them…

CAIR Bears

September 27th, 2010
2:27 pm

“Would you help me out on this Kyle, as seriously I cannot seem to find them…”

Along with a lot of other things. Her brain being on of them.

Kyle Wingfield

September 27th, 2010
2:42 pm

AmVet

September 27th, 2010
2:57 pm

Thanks, Kyle. Excellent stuff. Tons of great ideas there, IMHO

Some may contend that what i write next is getting somewhat close to splitting hairs, but bears examination.

To disabuse those who think the Cato Institute is “conservative”, they are identified as libertarian or classical liberal. To wit, I can find no references whatsoever to them calling themselves “conservative” on their website.

And a great deal of what they proffer on their home page flies in the face of today’s hijacked and misappropriated conservative movement. At least as espoused by the Republicans who have tragically taken hold of that mantle…

CAIR Bears

September 27th, 2010
3:16 pm

“Thanks, Kyle. Excellent stuff. Tons of great ideas there, IMHO”

AmVet, you are one wacky individual. On Bookman’s blog, you attack, attack, name call, attack and name call some more. On Kyle’s blog you act civil and refrain from attacking.

The nursing home must have a field day with you.

jconservative

September 27th, 2010
3:23 pm

Look, we have dug a deep hole in this country. That deep hole is the National Debt, now at $13.5 trillion and getting deeper by the minute. That debt must be accounted for in any discussion of taxes.

We know from the last 30 years that the US is not going to cut spending that amounts to more than a token cut here and there. We know that the US is not going to raise taxes by more than a token amount. And we know any tax cuts will be financed by borrowing money.

We know that the US middle class, that income group that carried the US economy for 50 years is disappearing. And the middle class income has been flat/stagnant for over a decade.

Federal Revenue for FY 2009 was $2.1 trillion with individual returns representing 43%, Social Security/Medicare being 42% and corporate taxes 7% of the total. The balance was excise, estate and gift taxes.

If corporations pay no taxes and individuals pay no taxes, who is going to pay the National Debt? Who is going to pay the $780+ billion defense budget that Republicans say they will increase in FY 2011? Who is going to pay the 40 person staff of 100 US Senators?

All we discuss is the evils of taxes. We never discuss the sources of needed revenue. If we need $3.6 trillion in revenue for FY 2011, someone show me the source of every penny of that $3.6 trillion revenue.

BUT, there is a new rule. You cannot borrow a dime!

Now, again, where is the revenue coming from?

jm

September 27th, 2010
3:30 pm

Obama doesn’t understand business or how to make jobs. The middle class will have to pay the taxes, if they want jobs, and not just soak corporations and the rich.

The world is a competitive place and both parties have sold our economy down the river. The Dems have pulled us out of the ditch with some stimulus (they’ve stopped the bleeding). We need the Republicans now to fix the remaining problems and get our fed budget under control.

HDB

September 27th, 2010
3:46 pm

jm September 27th, 2010
3:30 pm
“The Dems have pulled us out of the ditch with some stimulus (they’ve stopped the bleeding). We need the Republicans now to fix the remaining problems and get our fed budget under control.”

Question: Why would you empower the political party that DROVE the car into the ditch in the first place?? Historically, the more fiscally RESPONSIBLE party has been the Democrats!

The only time in recent history that counters this is from 1996-2000 when the GOP controlled CONGRESS…but a DEMOCRATIC President vetoed many Republican spending plans to tackle the deficit!! Total Republican control threw this nation into a tailspin that many (myself included) have yet to pull out from!!

Linda

September 27th, 2010
3:58 pm

jconservative @ 3:23, The $13.3 T is just a drop in the bucket. Don’t forget the $111 T in unfunded liabilities to social security & medicare, that there are 829 banks that are at risk of failing, that the federal reserve just bought $1.4 T of our debt, that GM sales are down 25%, that 1 out of every 6 Americans are receiving govt. assistance, that 47 states are facing budget shortfalls, that Fannie Mae & Freddie Mac are in receivership & the US owns or guarantees most of the mortgages under water.

In the NY Post on 9/19, economist Lawrence Kotlikoff with Boston University said, “The govt. is lying about the amount of debt. It is engaging in Enron accounting.” He said the $13.4 T is really $200 T.

The examples I used above are in addition to his $200 T.

I know how to solve the crisis. Both times I referred to these articles directly from the Dept. of Energy, Kyle put me in the corner (moderation). Last time, he never let me out.

Kyle Wingfield

September 27th, 2010
4:05 pm

Linda: I did take it out of moderation, albeit not until very late…the problem is that comments with more than one link go straight into moderation…try splitting them up if you want them to be posted immediately. Thanks.

JF McNamara

September 27th, 2010
4:13 pm

Well, we have a huge deficit and a lot of debt and anything anyone brings up to close the gap is “not pro business”. That’s just rhetoric. I’m sure they did an in depth analysis on globalization in general and applied it to that number. Whatever.

How about cutting the defense and war on terror budget in half and cutting every other departments budget in the federal sector by 10%. Couple that with raising taxes on EVERYONE by 5% and taxing overseas profits by an additional 5%. While we’re at it, how about doing an austerity plan to cut social security benefits now to stabilize the system?

That pretty much irritates everyone and it gets us going on getting a balanced budget. Oh yeah, that’s not really the goal. The goal is to root for your posse and grab as much as you can when they are in office. My bad. I’ll get back to work now.