President Barack Obama’s proposal to reduce or eliminate various tax deferrals and credits granted to U.S. multinational firms is a tax increase that likely will cause domestic job losses and declines in government tax revenues, industry insiders worry.
“The bottom line is it’s going to increase taxes on companies who are already paying higher tax rates at home than their competitors,” said Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers.
Obama announced in May a plan to limit the ability of U.S. companies to write off expenses and defer from taxation profits they earn overseas. They also would be blocked from reinvesting offshore earnings overseas without taking a U.S. tax hit.
Jobs Support Overseas Operations
“Totally ignored in this debate is that millions of U.S. jobs depend on competing overseas,” Coleman said. “Half of all U.S. manufacturing employees are employed by multinationals. U.S. jobs support those overseas activities. Many U.S. suppliers supply parts and materials to U.S. multinationals. By imposing almost $200 billion [over 10 years] of additional taxes on U.S. multinationals, we are going to impact jobs here.”
Obama attacked the U.S. tax code for allowing “a small number of individuals and companies” to “abuse overseas tax havens to avoid paying any taxes at all. And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India than if you create one in Buffalo, New York.”
Coleman said Obama inappropriately conflated tax evasion with longstanding tax policies that help U.S. companies compete globally.
“Unfortunately these issues get mixed up into this whole scheme of some kind of tax abuse,” Coleman said. “When you step back and look, you quickly realize the rhetoric does not match reality at all.”
U.S. Taxes Money Anywhere
Coleman noted the U.S. has a worldwide tax system, meaning the government taxes businesses no matter where the income is earned, whereas most overseas competitor nations charge little or no tax on foreign operations of domestic companies. The federal government has allowed various deferrals in an effort to put U.S. businesses on a more level playing field. Obama wants to end or limit those deferrals.
“For more than 40 years, we have tried to address this problem,” Coleman said. “Say you have a plant in Germany. You can pay German tax and defer U.S. tax as long as you reinvest it overseas.”
When money earned and taxed overseas is brought back to the United States, the federal government taxes it, putting U.S. multinationals at a disadvantage.
“A French competitor with German operations pays only the German tax, no matter if it brings the money back to France or not,” Coleman said.
Money Follows Incentives
Robert Carroll, a senior research fellow at the Tax Foundation, said the premise behind the Obama proposal “is that by raising the taxes paid on the foreign profits of U.S. companies earned abroad the companies will somehow have more incentive to locate their operations here in the United States.
“The proposal, however, is flawed and fails to recognize that in the increasingly global economy where capital flows freely across borders, the United States can no longer expect other countries to follow its policies,” Carroll said. “The proposal will penalize the foreign operations of U.S. companies operating abroad and make it more difficult for them to compete with foreign companies.”
He said the result would be U.S. companies losing out on overseas business opportunities.
“The manufacturing of tractors or generating facilities in places like China and India will be less likely to be done by U.S. companies,” Carroll said. “Rather, these business opportunities will more likely be won by the foreign competitors of U.S. companies, with the economic rewards—jobs and profits—going abroad rather than to U.S. companies.”
Double Taxation Problems
Daniel Mitchell, a senior fellow and tax policy expert at the Cato Institute, said the problem is “bad U.S. tax law. There should not be double taxation of saving and investment. Likewise, there should not be any tax on activity outside of U.S. borders.
“This is why all good tax reform plans, such as the flat tax and FairTax, eliminate double taxation and shift to territorial taxation—the common-sense notion of only taxing income earned inside national borders. If America wants better tax compliance, lower tax rates and tax reform is the right approach,” Mitchell added.
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.