The Obama Administration's Misguided Business Tax Crackdown

by Pejman Yousefzadeh on July 17, 2009

The Administration believes it has found both a good policy, and a winning political issue; taxing the foreign earnings of American firms, along with rhetoric about how the current tax system allows for American firms to engage in tax dodginess, and the outsourcing of jobs overseas.

Like most populist proposals to come out of the Administration, this one does not have a lot of substance to praise behind it. The Economist explains why:

If the goal is to improve the tax code, this grab-bag of measures is deeply disappointing. No one doubts that America’s corporate-tax system is a Byzantine mess of high statutory rates and oodles of exemptions. But much of that complexity is caused by the divergence between America’s system of taxing its firms (and citizens) on their worldwide income and the territorial system used by most other countries. Mr Obama’s proposals, particularly his partial reversal of firms’ ability to defer taxes, would add yet more complexity. Nor is there much evidence that they would boost domestic job creation, as the administration claims. In fact, by raising the tax bills of American firms and putting them at a disadvantage beside their foreign peers, Mr Obama’s tax changes may reduce domestic job creation and even induce companies to move offshore.

I have made it a point to weigh in on the degree to which tax havens have become a favorite scapegoat for the Obama Administration. Like most scapegoating efforts, this one features the generation of a lot more noise than it does the generation of good policy. And as for the issue of job outsourcing, well . . .

Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenue and nearly 10 million employees, recently released a study showing that as the overseas operations of U.S. corporations grow (about 2,200 U.S. corporations have overseas businesses), jobs and work are created here at home.

These jobs employ 22 million men and women, roughly 19 percent of the American work force, and these employees earn about 25 percent more than other American workers. These same companies contribute about $2.5 trillion annually to the U.S. gross domestic product, and they account for roughly 50 percent of U.S. exports.

Virginia’s 795 worldwide American companies are responsible for more than 50 percent of all private-sector employment in the state. These companies and their suppliers provide nearly 2 million high-paying jobs and are responsible for producing $198 billion in Virginia’s gross domestic product (GDP) and providing $107.5 billion in payroll to Virginia’s workers. Their continued success and prosperity are inextricably linked to the growth of our economy and the creation of jobs in Virginia.

Worldwide American companies, including MeadWestvaco and Brink’s, located here in the Richmond area, are doing what any smart business does — they are following the market. After all, 95 percent of the world’s consumers live outside the United States. U.S. corporations for the most part set up overseas operations in high-income countries. And, 90 percent of what those U.S. foreign operations make abroad, stays abroad and is consumed abroad.

Despite these overseas operations, our member companies agree that the heart and soul of these companies remain in the United States. Roughly 79 percent of their employees are here; 87 percent of their research and development is done here, and 74 percent of their capital investment is here.

At some point, it is worth asking whether the Obama Administration ever met a tax increase it didn’t like. As with many of its other tax increases, this one makes no sense whatsoever.

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