Destroying Jobs in Order to Save Them

Obama's corporate tax "reforms" make a bad situation worse

Last spring, partly in response to the anti-bailout tea parties that were sweeping through the country on and around the April 15 tax deadline, the president announced that he plans to simplify the tax code. That sounds like a worthwhile goal, but it turns out that forObama, simplification means taxing previously untaxed income.

The U.S. corporate tax rate is simply too high. When you add state corporate taxes to the 35 percent federal rate, you arrive at a whopping 40 percent average corporate tax burden, the second highest among the 30 countries in the Organization for Economic Cooperation and Development (OECD).

Not only is the U.S. rate too high, but the U.S. government also taxes corporations on their worldwide income. That means profits made by an American-owned computer plant are subject to U.S. tax whether the plant is located in Texas or Ireland. Most other major countries do not tax foreign business income as aggressively. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income.

These differences have important implications for American companies competing in foreign markets. Because of higher tax costs, U.S.-based firms are losing foreign market share, generating lower returns for American shareholders, and hiring fewer skilled workers back home in the United States. Under these conditions, it’s no surprise that American multinational companies that want to sell their goods abroad try to keep as much cash out of the U.S. as they legally can. It’s a matter of survival.

Other countries understand this. Several nations, most recently including Japan and Britain, are moving to a territorial system, taxing only corporate profits earned within their borders. By contrast, Obama is proposing to move in the opposite direction: He wants to make U.S. companies doing business abroad as miserable as U.S. companies doing business at home.

It is a mistake to assume that U.S. domestic firms and U.S. multinationals are primary competitors, engaged in a zero-sum struggle. In fact, the true competitors of U.S-based firms with international operations are mainly foreign-based companies. And in that competition, the existing U.S. corporate tax code puts American firms at a clear disadvantage—one for which the alleged tax 'loopholes' were intended to compensate.

What will happen if the president succeeds? To stay competitive some American companies will change their structures to become foreignowned firms. Firms still pay taxes on all U.S. income, but they no longer pay U.S. tax on foreign income. Companies that can’t afford the costs of inverting would have to reduce operations and/or fire workers.

Is it the president’s goal to destroy jobs? Probably not. So instead of making the corporate tax system worse, why not reform it? Why not avoid old protectionist tricks such as Buy American provisions and instead let U.S. firms compete abroad without the chains of the U.S. tax code.

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