PrintOctober 19, 2010
The 'Move Your Corporate Headquarters Offshore' Act
In his weekly radio address on Saturday, President Obama said, "There is no reason why our tax code should actively reward [American corporations] for creating jobs overseas. Instead, we should be using our tax dollars to reward companies that create jobs and businesses within our borders."
He was promoting a bill with a good title, the Creating American Jobs and Ending Offshoring Act. But a more accurate name would be the Move Your Corporate Headquarters Offshore Act, since its main effect would be to cause corporate headquarters to leave the United States.
Fortunately, this bill was filibustered on September 28 by a unanimous vote of Senate Republicans joined by Senators Joe Lieberman, Max Baucus, Jon Tester, Ben Nelson, and Mark Warner. Following is an official summary of the bill:
Creating American Jobs and Ending Offshoring Act - Amends the Internal Revenue Code to: (1) exempt from employment taxes for a 24-month period employers who hire a employee who replaces another employee who is not a citizen or permanent resident of the United States and who performs similar duties overseas; (2) deny any tax deduction, deduction for loss, or tax credit for the cost of an American jobs offshoring transaction (defined as any transaction in which a taxpayer reduces or eliminates the operation of a trade or business in connection with the start-up or expansion of such trade or business outside the United States); and (3) eliminate the deferral of tax on income of a controlled foreign corporation attributable to property imported into the United States by such corporation or a related person, except for property exported before substantial use in the United States and for agricultural commodities not grown in the United States in commercially marketable quantities.
The first item violates the rules of the World Trade Organization as a wage subsidy directly related to foreign trade. The second is unlikely to have any economic effect since it is more or less the law currently. And the third would cause those corporations affected to consider moving their headquarters to an overseas location, as some have already done to escape paying the difference between American taxes and foreign taxes to the American government on income earned abroad. With American corporate income taxes the second-highest in the world, as shown in the chart below, that difference can be significant.
How to Fix Offshoring
The American public is on the right track in its anti-offshoring sentiment (86% of Americans oppose offshoring), but it is ill-served by phony measures from the Democrats that would make the problem worse and by the complete failure of the Republican establishment to address the issue. In a previous commentary ("How to Win the Trade War with the Democrats"), we urged that the Republican Party win this issue by adopting a balanced trade position.
Offshoring is bad only because trade is imbalanced. Otherwise, jobs lost to imports would be replaced by even better jobs in our export-related sectors. America's huge trade deficits are intentionally produced by trading partners, including China, who practice mercantilism (the strategy of maximizing exports and minimizing imports).
Our $28-billion monthly trade deficit with China in August 2010 represents about 2.8 million American workers who would be producing about $10,000 worth of exports per month each were China not actively keeping out American products.
Other than tariffs on Chinese tires, which were met by Chinese tariffs on American chicken parts, President Obama has relied upon talk to change Chinese policy. Since he took office, 876,000 more American manufacturing workers have lost their jobs.
Congress could easily balance trade. All it would have to do is enact a scaled tariff, a tariff on imports whose rate varies with the size of our trade deficit with each trade-manipulating country. It goes up when our trade deficit with that country goes up, goes down when our trade deficit goes down, and disappears when our trade deficit disappears.
The Real Corporate Income Tax Problem
As far as the corporate income tax is concerned, the real problem is our overly high tax rate. When not campaigning, President Obama recognizes this. According to an October 4 Financial Times report,
Barack Obama signalled he was open to lowering the US corporate tax rate from its level of 35 per cent, amid speculation that the administration could seek broad-based reform of the tax code as early as next year.At a meeting of his economic recovery advisory board on Monday, the president said: "We would be very interested in finding ways to lower the corporate tax rate so that companies that are operating overseas can operate effectively and aren't put at a competitive disadvantage."
The ideal reform would abolish the federal corporate income tax altogether. Then corporations would be given a tax incentive to move their factories and headquarters to the United States instead of away.
If revenue is needed, a Value-Added Tax (VAT) on goods would be an ideal replacement since it would be paid on foreign products sold in the United States, not just American products, and without hurting American exports since, under the rules of the WTO, it can be rebated to exporters (while corporate income taxes cannot).
Tax reform will probably be on the national agenda next year. Democrats will probably try to add the VAT to the code while slightly lowering the corporate income tax. Republicans should insist upon getting rid of the corporate income tax altogether. At least the rate should be reduced to a level competitive with other countries (e.g., Ireland's 12.5% rate).
Giving a bill a good title does not make it a good bill. The Creating American Jobs and Ending Offshoring Act would neither create American jobs nor end offshoring. It would actually encourage American corporations to move their headquarters offshore. In order to create jobs, our ultra-high corporate income tax needs to be drastically lowered or eliminated, and we need to insist upon balanced trade.
The authors maintain a blog at www.idealtaxes.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.
