Barack Obama acts to close tax breaks for offshoring
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Companies can defer tax on overseas income as long as those dollars remain abroad
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President John F. Kennedy in 1961 railed against the two-tiered system of corporate taxation that, he said, encouraged U.S. investment overseas compared to home.
— PHOTO: AP
PLUGGING THE LOOPHOLE: Paul Ryan, ranking Republican on the House Budget Committee, speaks during a news conference at Capitol Hill in Washington to discuss President Barack Obama’s fiscal 2010 federal budget which was released on Thursday last.
President Barack Obama’s pledge to end tax breaks for multinational corporations “that ship our jobs overseas” is welcome news for organised labour, 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 non-partisan 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 globalisation,” said Robert McIntyre, Director of Citizens for Tax Justice, an organisation that has received support from organised labour. “But we don’t have to pay these guys to do it.”
Deferral clause
At issue is an arcane provision of the tax code known as the deferral clause. It allows businesses to avoid paying the 35-per cent 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 per cent 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. The pool of U.S. multinationals’ “unrepatriated foreign earnings” at the end of 1999 was estimated at $403 billion in a report by the Congressional Research Service in a report to Congress.
By the end of 2002, the pool had grown to $639 billion — an increase of more than 50 per cent.
The companies that take advantage of the deferral clause read like a Who’s Who of the Fortune 500. A search of SEC (Securities and Exchange Commission) filings found that ExxonMobil held “undistributed earnings” from foreign subsidiaries amounting to $56 billion at the end of 2007, while drug giant Pfizer had $38 billion at the end of 2003.
President John F. Kennedy in 1961 railed against the two-tiered system of corporate taxation that he said encouraged U.S. investment overseas compared to home.
More recently, the cry of ending tax breaks for corporations shipping jobs overseas became the mantra of Sen. John Kerry’s unsuccessful presidential campaign in 2004.
Then Sen. Hillary Clinton picked up the same phrase in 2008, as did then Sen. Barack Obama.
First budget
The president’s first budget, released last Thursday, “makes real the promise to close that loophole,” said White House spokesman Robert Gibbs.
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 ten years.
Whatever the reform proves to be, organised labour 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 organisation of major U.S. corporations. “It doesn’t work that way.”
World’s highest tax rate
U.S. corporate tax rates are among the world’s highest, Mr. 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.
Labour 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 Mr. Obama shore up support from organised labour, a critical constituency that helped him win the election.
“Will it be effective?”’ said Mr. Hufbauer. “In a word `no,’ but it will probably make some people feel good. In politics, that may be important.”
—New York Times News Service
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