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News : US Economy Last Updated: Aug 24, 2010 - 4:49:58 PM

Economists claim planned tax measures on US multinationals' overseas earnings will destroy jobs and hobble exports
By Finfacts Team
Jun 9, 2010 - 4:29:28 AM

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US Capitol

Economists claim that planned tax measures on US multinationals' overseas earnings will destroy jobs and hobble exports.

At the end of May, the US House of Representatives approved the ‘American Jobs and Closing Tax Loopholes Act’ on a 215-204 vote, clearing the way for the US Senate to hold final discussions this month. Senators Max Baucas, chairman of the Finance Committee and Carl Levin are are the main sponsors of the proposals at a time of public anxiety about high unemployment.

“In this legislation, which is job creating, it closes the loophole which has allowed businesses to ship jobs overseas. Can you believe that we have a tax policy that enables outsourcing? So, if you have one thing to say about this bill to your constituents, you can say that today, you voted to close the loophole to ship US jobs overseas and giving businesses a tax break to do so,”Speaker Nancy Pelosi told the lawmakers before the voting process started on May 28th. “It is not right. It will be corrected today.”

The sponsors claim taxpayers have devised several techniques for splitting foreign taxes from the foreign income on which those taxes were paid. With these techniques, the foreign income remains offshore and untaxed by the United States, while the foreign taxes are currently available in the US to offset US tax that is due on other foreign source income. In many cases, the foreign income is permanently reinvested offshore such that it likely will never be repatriated and taxed in the US.

Gary Clyde Hufbauer and Theodore H. Moran, economists at the Peterson Institute for International Economics in Washington DC, say the bill will hurt American workers, reduce American exports, and make American companies less competitive in the international marketplace. Since the US Senate has already passed companion legislation, the American Workers, State, and Business Relief Act, these ill-considered bills could soon be reconciled in conference and become the law of the land. If so, American firms and workers will pay the price.

The tax measures costing $14bn over 10 years that affect foreign operations of US-based multinational corporations (MNCs), say Hufbauer and Moran, illustrate an unfortunate direction of US tax policy under the Obama administration and its congressional allies: the eagerness to tax the foreign income of US-based MNCs as if they competed only with firms that are subject to US tax rules.

The economists say MNCs based in Europe, China, India, or Brazil pay far less than the US tax rate when they compete head-to-head with US firms in world markets. Studies show that plants of US multinationals are the most productive in the United States, most technology-intensive, and pay the highest wages. If US tax policy is changed so as to hinder outward investment by US MNCs, the result will be fewer US exports, and fewer exports will spell fewer US jobs.

Hufbauer and Moran say income earned outside the United States essentially pays the foreign tax rate in the host country and only pays a small “top-up” tax when repatriated to the United States, usually under 5 per cent. In the view of President Obama and his congressional allies, this system amounts to a vast network of “loopholes.” Unless and until US-based MNCs pay the US corporate tax rate on their entire worldwide income, they are, in this populist view, evading their “fair share” of the tax burden and, at the same time, “shipping jobs abroad.”

But President Obama’s tax philosophy and the legislation now coming out of Congress ignore two important facts: first, that the US corporate tax rate, when federal and state taxes are combined, is one of the highest in the world (around 39 per cent); and second that competing MNCs based in Europe, China, India, or Brazil pay far less than the US tax rate when they compete head-to-head with US firms in world markets.

They say if the purpose of US tax policy is to weaken US-based firms in the global economy, to move headquarters jobs to friendly locales like Toronto, Hong Kong, and London, to undermine President Obama’s goal of doubling US exports, and to shift manufacturing jobs to China and service jobs to India, then the bills make good sense. Otherwise they make no sense.

The economists add that the best bottom line for American workers - - and the American economy as a whole - - is to make the United States a more favourable location for American multinationals to do business. Instead of raising taxes on the foreign income of US-based MNCs, Congress should be lowering the US corporate rate to 20 per cent. Other countries understand the competitive realities well enough, but Congress seems determined to turn the United States into a loser.



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