USA Today Story on Corporate Tax Blames the Victim

Compared to other nations, the United States has a medium-sized tax burden. Most of Europe has harsher taxes, but there are plenty of place in the world that have lower tax burdens. But there is one area where America is behind almost every other nation, and that is the taxation of corporate income. The combined federal/state corporate rate is nearly 40 percent, exceeded by only Japan. Not only does the U.S. have a high tax rate, but the IRS taxes the “worldwide” income of companies, which means that it is especially hard for American companies to compete in foreign markets - particularly since almost every other nation relies on the common-sense approach of territorial taxation, which means they do not tax the “foreign-source” income earned by their companies. The only silver lining to this dark cloud is that American companies have some ability to postpone when they pay the additional layer of tax on their foreign-source income. In the minds of greedy politicians (and sloppy reporters), however, this “deferral” of a discriminatory tax is a loophole. Here’s what USA Today reported:

Democratic presidential contenders Hillary Rodham Clinton and Barack Obama have cast it as an outrage that should be a key target for the next president: a tax break they say encourages employers to ship American jobs abroad. The charge could be dismissed as typical campaign-trail exaggeration during a Democratic primary season marked by populism, except for one thing. Many analysts say it’s true. “The U.S. tax system does provide an incentive to locate production offshore,” says Martin Sullivan, a contributing editor to Tax Notes, a non-profit publication that tracks tax issues. At issue is the U.S. tax code’s treatment of profits earned by foreign subsidiaries of American corporations. Profits earned in the United States are subject to the 35% corporate tax. But multinational corporations can defer paying U.S. taxes on their overseas profits until they return them to the USA — transfers that often don’t happen for years. …”If you had two companies in Pittsburgh that both were going to expand capacity and create 100 jobs, our tax code puts the company who chooses to put the plant in Pittsburgh at a competitive disadvantage over the company that chooses to move to a tax haven,” says former White House economist Gene Sperling, a Clinton adviser.

But Senators Clinton and Obama, not to mention Martin Sullivan and Gene Sperling, have things backwards. It is America’s high tax rate that creates an incentive for jobs to be overseas. Deferral simply means that American companies are only somewhat disadvantaged in their efforts to earn market share in other nations. The USA Today story does acknowledge that America has a high corporate tax rate, but the reporter is surprised that this high rate means low revenue, even though it is actually a sign of “Laffer Curve” responses to punitive taxation:

The U.S. has one of the highest corporate tax rates in the world, and its corporate tax code has a well-earned reputation for complexity. But despite the high rate, the U.S. takes in less annual revenue from corporate taxes, measured as a percentage of economic output, than almost all other major economies.

The current system is bad for America, but critics have the wrong solution. Instead of making the U.S. tax code even more punitive by ending deferral, America needs a big reduction in the corproate tax rate. So long as America’s rate is far higher than other nations, companies will have an incentive to create jobs abroad. Ending deferral would not alter that incentive. All that would happen is that foreign companies would be creating a larger share of those jobs. The story does quote a couple of economists who have starkly different estimates of employment implications, but both agree the current system causes job losses:

Kimberly Clausing, a professor of economics at Reed College in Portland, Ore., says the corporate tax code may account for up to 3 million jobs being abroad. Gary Hufbauer, an economist who has written a book on international taxation, puts the number at just 200,000. …The Bush administration warned last year that U.S. corporate giants are at a competitive disadvantage in world markets because foreign rivals pay lower taxes in their home countries.

The article also notes that U.S. companies that create jobs abroad also create jobs in America. In other words, successful, growing firms tend to expand in all markets. A lower corprorate tax rates, needless to say, is one of the keys to a pro-growth environment for American companies. Ireland is a good example of a nation that reaps large benefits from a low corporate tax:

Matthew Slaughter, a Dartmouth College economics professor who worked in the Bush administration, says that historically, multinationals that have added jobs at their foreign affiliates also have expanded hiring in the USA. As U.S.-owned foreign units prosper, their corporate parents must add accountants, marketing specialists and other managers at their U.S. headquarters. In 2004, Slaughter released a study, based on employment data for the decade ending in 2001, which concluded that U.S. multinationals created two jobs in the USA for every job they added abroad. That comforting conclusion broke down in more recent years. From 1991 through 2005, multinationals created almost as many jobs abroad (3.6 million) as they added at home (3.8 million). …Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals’ units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined.