President’s Corporate Tax Hike Seen As Job-Killer

Published October 18, 2010

Congress adjourned before advancing a bill to increase taxes on the profits of U.S. companies with foreign subsidiaries, but the issue could arise again during the lame duck session.

Shortly before Congress adjourned in late September, President Barack Obama stated: “For years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that.”

Supporters of the proposed corporate tax hike claim it would protect jobs by encouraging businesses to stay in the United States. However, Obama’s plan would likely drive more businesses out of the nation and drain even more money out of the U.S. economy, opponents say.

Microsoft CEO Steve Ballmer has already declared the computer software giant will move facilities and jobs out of the United States if the President’s plan is enacted.

Nearly Unique Tax
The United States is one of the few nations that taxes global profits of domestic companies. After paying the corporate tax of their host country, U.S. companies must pay the U.S. Treasury the difference between the U.S. corporate tax rate and the foreign rate once they bring profits back to the United States.

Obama’s plan would end the deferral of foreign income by forcing companies to pay U.S. corporate taxes immediately on any profits earned.

In 1986 Congress abolished deferral of foreign shipping income earned by U.S.-controlled firms. No other country taxed foreign shipping income. According to a 2007 study in Tax Notes by former Joint Committee on Taxation director Ken Keis, “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%.”

‘A Real Disaster’
The tax change led foreign competitors not subject to tax on their shipping income to buy U.S.-based shipping companies, Keis concluded. He called the loss of deferral of foreign shipping income “a real disaster for U.S. shipping.”

The current proposal would abolish deferral of foreign income for all U.S. businesses.
The United States already has one of the highest corporate tax rates in the world, at 35 percent for the federal tax. Most states impose their own corporate taxes, making the average U.S. rate nearly 40 percent. Japan is the only developed nation with a higher corporate tax, and the nation’s leaders have already committed to lowering it.

Even after adjusting for credits and deductions, the effective combined U.S. federal and state tax rate on new capital investment is 35 percent, compared to the OECD average of 19.5 percent and the world average of 18 percent, according to a May 2010 report by the Cato Institute using World Bank data. The OECD is the Organisation for Economic Co-Operation and Development and includes 33 developed nations in North America, Europe, and the Middle East.

Julie Borwoski ([email protected]) is a staff writer at FreedomWorks.