NCPA - National Center for Policy Analysis

WHY CONGRESS SHOULD NOT TAX REINVESTED EARNINGS ABROAD

January 15, 2009

Politicians are making a huge mistake by targeting alleged tax breaks to corporations that ship jobs overseas, says Cato Institute's Daniel Griswold.  According to his study, Griswold finds that U.S. corporations that invest in overseas production are actually more likely to increase employment and production at the U.S.-based facilities.

In other words, investing abroad is not about "shipping jobs overseas."  The evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together.  A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations.  More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company, says Griswold.

Other benefits:

  • Investing in foreign affiliates has become the primary way that U.S. companies sell their goods and services abroad.
  • For every $1 billion in goods that U.S. producers exported in 2006, they sold $6.2 billion through majority-owned foreign affiliates.
  • Close to 90 percent of the goods and services produced by those affiliates were sold to customers either in the host country or exported to consumers in third countries outside the United States.

If Washington wants to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies.  Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad.

The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil, concludes Griswold.

Source: Daniel Griswold, "'Shipping Jobs Overseas' or Reaching New Customers? Why Congress Should Not Tax Reinvested Earnings Abroad," Center for Trade Policy Studies (Cato Institute), Free Trade Bulletin, No. 36, January 13, 2009.

For text:

http://www.freetrade.org/pubs/FTBs/FTB-036.pdf 

 

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