NCPA - National Center for Policy Analysis


July 1, 2009

In May, President Obama announced he wanted to "reform our international tax laws" so that they don't "stack the deck against job creation here on our shores."  In a smooth bit of political rhetoric, the White House linked international corporations to individuals who illegally evade taxes by secretly stashing income overseas, says Geoff Colvin, senior editor at large for Fortune magazine.

"Today our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," or so began the White House's May 4 statement.  In the very next sentence, the administration segued to "our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens."

The average citizen had to conclude that most big U.S. companies are tax cheats.  Only a dedicated student of accounting would figure out that the term "tax haven" as defined by the Treasury Department means any country with a lower corporate tax rate than America's, which is all countries except Japan.  The reality is that the administration is lashing out against perfectly legal behavior, says Colvin:

  • A U.S. company that makes money in Country X pays Country X's taxes on that money; if the company ever brings the money back to the United States, it must also pay the tax that would be due under America's higher rate.
  • The administration argues that because the United States has almost the world's highest corporate tax rate (and even Japan's is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs.
  • The White House therefore proposes charging all American companies full freight -- the whole difference between their overseas taxes and the U.S. corporate rate -- on all their profits as soon as they're earned, no matter where; this measure, in their minds, would bring jobs home.

If the logic eludes you, you're not alone, says Colvin.  The bottom-line effect of the change would be a steep tax hike -- more money vacuumed out of corporate coffers.  Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States?  The answer is clear.  It's why Microsoft chief executive Steve Ballmer said recently that if the change is enacted, "we're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S."

Source: Geoff Colvin, "Higher Taxes for Business Mean We All Pay," Washington Post, June 30, 2009.

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