Chattanooga Times Free Press (Tennessee)
March 1, 2009 Sunday
Obama tries to close tax breaks for offshoring
WIRE - FINANCIAL; Pg. C2
Hearst Newspapers
WASHINGTON -- President Obama's pledge to end tax breaks for multinational corporations "that ship our jobs overseas" is welcome news for organized labor, but tax experts question whether it will help American workers.
"It's not clear that changing the tax code will help keep jobs in U.S.," said Rosanne Altshuler, co-director of the nonpartisan Urban-Brookings Tax Policy Center. "And it's not clear that by investing abroad, U.S. multinationals are hurting the U.S. economy."
That may be so. But to corporate critics, it's a matter of fairness -- not macroeconomics.
"Maybe we can't fight the forces of globalization," said Robert McIntyre, director of Citizens for Tax Justice, an organization that has received support from organized labor. "But we don't have to pay these guys to do it."
At issue is an arcane provision of the tax code known as the deferral clause. It allows businesses to avoid paying the 35-percent U.S. corporate tax rate on overseas earnings.
Companies can defer tax on overseas income as long as those dollars remain abroad. If they decide to bring those earnings home, they pay the 35 percent rate minus whatever they paid in taxes to foreign governments. For the most part, experts say, corporate money earned overseas stays overseas.
By any standard, the dollar amounts are staggering.
Details of changes to the deferral clause remain vague. The budget states that "international enforcement" and "reform (of) deferral and other tax reform policies" will add $210 billion in tax revenues to the U.S. treasury over the next 10 years.
Whatever the reform proves to be, organized labor says it is long overdue.
"It's a scandal that it's gone on this long," said Bob Baugh, executive director of the AFL-CIO's Industrial Union Council. "Companies get tax credits and write-offs for closing plants here, only to open them overseas and keep profits offshore while they ship products back to the U.S. It's had a terrible impact."
A study on the impact of international trade on U.S. jobs by the Washington-based Peterson Institute of International Economics found that the growing U.S. trade deficit accounted for 900,000 lost American jobs between 2000 and 2003. Other estimates put the number far higher.
Business views changes on taxation of foreign earnings as hurting American competitiveness overseas.
"Companies don't sit here and talk about how the tax system makes it more advantageous to move jobs overseas," said John Castellani, president of the Business Roundtable, an organization of major U.S. corporations. "It doesn't work that way."
U.S. corporate tax rates are among the world's highest, Castellani said, and ending tax breaks for overseas earnings would make them even higher.
"One in five jobs in the U.S. is tied to international trade," he said. "What we don't want to do is to create a tax code that makes it impossible to compete outside the U.S."
Experts say that many factors go into a company's decision to locate a facility abroad, not just taxes.
Labor costs overseas are a fraction of those in the U.S., they say, and foreign plants also help U.S. corporations sell products abroad.
A number of corporate leaders have proven adroit at avoiding taxes by parking income ostensibly earned in the U.S. in offshore accounts. Instead of saving American jobs, drastic changes in the tax laws might lead some corporations to lift anchor from U.S. shores altogether.
"If we tax subsidiaries more highly, over time the U.S. becomes a less desirable place to have a multinational corporate headquarters," said Gary Hufbauer, a former Treasury Department official who is now a senior fellow at the Peterson Institute in Washington. "I don't think that can be good for the U.S. economy."
Changing the tax code to put domestic manufacturers and overseas-based subsidiaries on equal footing may be less about saving jobs than making a political point. The change may help Obama shore up support from organized labor, a critical constituency that helped him win the election.
"Will it be effective?" said Hufbauer. "In a word 'no,' but it will probably make some people feel good. In politics, that may be important."
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(Dan Freedman can be reached at 202-263-6400 or at the e-mail address dan(at)hearstdc.com)