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American Jobs in a Global Economy

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“We very much want to work with others to make sure that we have … as pro-American a tax system for corporations as we possibly can …”  Lawrence Summers

The Administration is struggling to fund its spending spree in ways that would nominally be consistent with the President’s campaign promises.  The Obama budget proposed to inflict two substantial tax increases on U.S. corporations with global operations. One would make it more expensive to bring cash from those operations into the U.S.  The other would make it expensive (on average 30% more expensive) to pay Americans, rather than citizens of any other country, to perform headquarters administrative jobs such as accounting, IT, or HR. These proposals were supposedly aimed at fulfilling the promise to “end tax breaks for shipping jobs overseas”.  While they hurt companies with global operations, it is hard to see how they would do anything other than reduce U.S. jobs.

The President’s problem here, as in other areas, is that in his effort to produce campaign one-liners he misstated the underlying problem. America does not provide tax breaks for shipping jobs overseas. It provides a tax penalty for locating jobs here. That’s a different problem, and it has a different cure.

America is not the powerhouse it used to be, and we need to get used to that fact. Only 28% of the world’s largest 300 corporations are American.  Our once formidable advantage in science and engineering has slipped. Now our companies must compete against potent rivals. The foreign operations of those rivals are not taxed at all by their home countries. When the U.S. tries to raise revenue by boosting the current tax on the foreign operations of our companies, we saddle them with a potentially fatal competitive burden.  A foreign owned corporation can bring home up to 54% more earnings than its U.S. owned rival from a dollar earned by a factory in a tax favored location.  That kind of disadvantage can break a company, destroying headquarters jobs and, in time, even U.S. manufacturing jobs. A company that can’t compete overseas cannot sustain the level of research and development needed to produce the new products it needs to compete here at home. We need to minimize the tax that our companies pay on their foreign factories.

But if tax rates on foreign operations are kept low, that puts U.S. operations at a disadvantage. America saddles its domestic corporate activities with the second highest tax rate in the developed world. Is there a way to reduce this without making corporations even more powerful than they are today, and without aggravating our government deficit or putting an even higher percentage of U.S. income into the hands of the wealthy? Yes there, is, and in fact it’s quite simple.

Corporations could be given a deduction for the dividends they pay to their shareholders. If the corporations didn’t pay out their cash, they would get no tax benefit, so the corporations would not end up with more cash.  The revenue loss would be made up at the individual level by taxing the dividends and stock gains the individuals receive.  Overall, the individuals would be no worse off than they are today. Why?  Because the corporations would have higher earnings due to the deduction, and they would have to pay those earnings out to their shareholders.  This increase would exactly match, overall, the tax imposed on the shareholders, so they would come out even. But now there would be no required corporate level tax on U.S. operations. The U.S. would be the best place in the world to put jobs, taxwise. Our companies would be in a position to trounce their foreign-owned rivals. That would eliminate the “tax benefit for shipping jobs overseas” in a way that would make us stronger rather than weaker, with higher employment and higher wages. And guess what – those workers pay taxes on those higher wages, reducing the deficit.

So let’s give the President a re-do on his campaign slogans. Mr. President, you may re-word your promise to “provide deficit reducing incentives to create jobs in America”. We’ll also politely avert our gaze while you retract your budget proposals and replace them with a tax policy that makes more sense. A new Administration is allowed to make mistakes. It just needs to recognize and correct them before permanent damage is done to our economy.

 

http://www.sharedeconomicgrowth.org

Matt Lykken graduated with honors from Harvard Law School in 1985 and has been working as a tax attorney for 27 years. He began his career with the Office of Chief Counsel, I.R.S., and for the last 22 years has worked as an international tax planner (more...)
 

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