TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, September 27, 2010

WSJ: The Send Jobs Overseas Act

Wall Street Journal editorial, The Send Jobs Overseas Act:

[T]he President's plan reveals how out of touch Democrats are with the real world of tax competition. The U.S. already has one of the most punitive corporate tax regimes in the world and this tax increase would make that competitive disadvantage much worse, accelerating the very outsourcing of jobs that Mr. Obama says he wants to reverse.

At issue is how the government taxes American firms that make money overseas. Under current tax law, American companies pay the corporate tax rate in the host country where the subsidiary is located and then pay the difference between the U.S. rate (35%) and the foreign rate when they bring profits back to the U.S. This is called deferral—i.e., the U.S. tax is deferred until the money comes back to these shores.

Most countries do not tax the overseas profits of their domestic companies. Mr. Obama's plan would apply the U.S. corporate tax on overseas profits as soon as they are earned. This is intended to discourage firms from moving operations out of the U.S.

The real problem is a U.S. corporate tax rate that over the last 15 years has become a huge competitive disadvantage. The only major country with a higher statutory rate is Japan, and even its politicians are debating a reduction. 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%. ...

The lesson here is that tax rates matter in a world of global competition and the U.S. tax regime is hurting American companies and workers. Mr. Obama would add to the damage. His election-eve campaign to raise taxes on American companies making money overseas may not be his most dangerous economic idea, but it is right up there.

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Logically, if current and proposed tax law makes it disadvantageous for US-based companies to invest overseas then, for lack of anywhere better to invest, those companies are pretty much stuck (for tax reasons, anyway) with investing in the US. Given the parlous state of the economy there is precious little reason to do that just now.

That the increased tax disadvantages may also discourage direct investment from overseas, however, is a serious problem that does not seem to have been thought through.

Since 2001 the United States has been steadily if irregularly building a financial wall around its citizens (e.g. FATCAT and FBAR) and domestic companies to discourage them from taking their capital - and themselves - off the US "reservation".

As US policy makers blundered along with their crude efforts to stanch hemorhaging and human capital out-flows, they have repeatedly shot themselves in the financial foot by applying these various punitive sanctions to foreign direct investors, i.e. "blood donors".

The problem for the USA - as it was for the East Germans - is how to attract pilgrim capital from abroad while simultaneously preventing the talented home town yokels from seeking greener pastures elsewhere - and still pretend that the local yokels are a free people.

The problem will resolve itself as soon as the US powers-that-be realize that the real US economy needs foreign capital inflows more than the rest of the world needs US capital exports.

In other words, we may be able to produce an exportable surplus of corn - but not coin.

Posted by: John | Sep 28, 2010 6:14:20 AM