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News : International Last Updated: May 13, 2010 - 7:48:36 AM


Higher taxes on US-based multinationals would hurt US workers and exports; US share of MNC employment at 69%
By Michael Hennigan, Founder and editor of Finfacts
May 12, 2010 - 6:50:17 AM

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Higher taxes on US-based multinationals would hurt US workers and exports according to economists, Gary Clyde Hufbauer and Theodore H. Moran, at the Peter G. Peterson Institute for International Economics, based in Washington DC. Meanwhile, the US share of employment in multinational companies (MNCs) has fallen from 79 per cent in 1989 to 69 per cent in 2008, according to data published by the US Bureau of Economic Analysis last month.

In a policy brief published this month, Hufbauer and Moran say that President Barack Obama declared in his State of the Union address - - echoing the rhetoric during his days as presidential candidate - - that "it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America." They ask: Do US multinationals deserve tax punishment because they "ship jobs overseas"?

The authors cite studies that compare US firms engaged in outward investment with similar firms that stay at home. They conclude that outward bound firms consistently export more from the United States than the home firms. If US tax policy were changed so as to hinder outward investment by US firms, evidence indicates US export performance would be weaker, not stronger.

These tax changes would not lead to more investment at home either. Hufbauer and Moran say that the best bottom line for American workers - - and the American economy as a whole - - is to keep the United States a favourable location for American multinationals to do business. The plants of US multinationals are the most productive in the United States, most technology-intensive, and pay the highest wages.

In contrast to most countries that maintain simple territorial tax systems, either de jure or de facto, the United States subjects its multinationals to worldwide taxation.

The authors say that according to the Tax Foundation, as of 2009, the combined US federal and state statutory corporate tax rate was about 39 per cent, about 13 percentage points higher than the average OECD combined corporate tax rate. Among 30 OECD members, the United States has the second highest combined statutory corporate income tax rate after Japan (40 per cent).

The brief says the United States should align its taxation of multinationals to the territorial norms of foreign competitors - - from France and Germany to Brazil, India, and China. It should adopt its own version of territorial taxation and allow US-based multinationals to repatriate dividends from their foreign subsidiaries at a flat rate of 5 per cent, with no foreign tax credit. This was successfully tried for 2005 in the American Jobs Creation Act of 2004 (the AJCA). The result was a gush of repatriated income, around $300bn, and revenue that the US Treasury would never have seen.

Hufbauer and Moran say that in 2010, the Congress should lay aside the administration's proposals for punishing US multinationals with higher taxes and instead make the AJCA tax of 5 per cent on repatriated dividends a permanent part of the tax code

US multinational companies: US and foreign operations

According to the Bureau of Economic Analysis last month, worldwide employment by US multinational companies (MNCs) decreased 0.4 per cent in 2008, to 33.4m workers, resulting from mostly offsetting changes in the United States and abroad. Employment in the United States by US parent companies decreased 1.3 per cent, to 22.9m workers. On a comparable basis, total private-industry employment in the United States decreased 0.7 per cent in 2008. The employment by US parents accounted for almost one-fifth of total US employment in private industries. Abroad, employment by the majority-owned foreign affiliates of US MNCs increased 1.7 per cent, to 10.5m workers.

Worldwide capital expenditures by US MNCs increased 4.1 per cent in 2008, to $708.2bn. Capital expenditures in the United States by US parent companies increased 2.3 per cent, to $519.7bn. Capital expenditures abroad by their majority- owned foreign affiliates increased 9.1 per cent, to $188.5bn.

Sales by US parent companies increased 3.2 per cent in 2008, to $9,509.0bn. Sales by their majority-owned foreign affiliates increased 10.9 per cent, to $5,520.2bn.

Employment in the United States by US parent companies accounted for 69 per cent of the worldwide employment of US MNCs in 2008, which was unchanged from 2007. The US-parent share of the worldwide capital expenditures of US MNCs in 2008 was 73 per cent, down from 75 per cent in 2007.

The BEA says US-parent share of MNC activity can change for a number of reasons, and the changes do not uniformly correspond to either additions to, or subtractions from, employment and capital expenditures in the United States. Examples of factors other than production shifting that might be associated with a change in the parent and affiliate shares of MNC activity include different rates of economic growth in the United States and in specific markets where investment is occurring abroad, or the creation of new market opportunities abroad that cannot be served by exports from the United States.

Foreign multinational companies: US operations

Partly reflecting selloffs of foreign ownership shares in US companies, employment in the United States by majority-owned US affiliates of foreign MNCs decreased 1.0 per cent in 2008, to 5.5m workers. The employment by affiliates accounted for 4.7 per cent of total US employment in private industries, the same share as in 2007. Capital expenditures by these affiliates increased 0.3 per cent in 2008, to $190.7bn. Sales by US affiliates increased 1.6 per cent, to $3,406.5bn.

The BEA says changes in the measures of activity of majority-owned US affiliates of foreign companies may reflect a variety of factors, including not only changes in the operations of given firms, but also entries and exits from the universe of majority-owned US affiliates. For example, the decline in employment by US affiliates in 2008 partly reflected changes in ownership that resulted in exits of companies from the universe of majority-owned US affiliates.

Ireland

The value added as percentage of GDP of US firms overseas was highest in Ireland in 2005, according to the BEA.

BEA figures showed that the combined net profit of US corporations in Ireland doubled between 1999 and 2002 from $13.4bn to $26.8bn and was $48bn in Ireland in 2005, compared with $37.01bn in the UK and $74.06bn in the Netherlands. US companies in Germany made net profits of $11.22bn in 2005; French affiliates reported income of $9.52bn and Italian operations made $8.58bn.

While foreign-firms, mainly American, are responsible for 90 per cent of Ireland's tradable goods and services exports, the sector stagnated during the property bubble.

At 1.9 million, we now have 400,000 more in employment than in 1998 and 200,000 more in unemployment, but employment in the main growth engine of the economy - -  the foreign-owned sector – is at 1998 levels of 118,000.

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