Economy & Business

Obama’s Budget Fumbles

U.S. companies are already at a competitive disadvantage, and Obama would make it worse.

Team Obama keeps trying out new tax plays, and all of them lose yards for the economy. The team fumbled on its 529 College Savings tax idea, and its plan to hike capital-gains taxes amounts to sacking America’s high-tech quarterback in Silicon Valley.

In its budget released today, Team Obama’s latest fumble is to raise taxes on the foreign earnings of U.S. companies. Actually, the plan is more like a quarterback getting confused and running down the field the wrong way to score a touchdown for the opposing team. Obama’s budget would impose a 14 percent one-time tax on the accumulated foreign earnings of U.S. companies, and then impose a 19 percent tax on foreign earnings going forward. It would make America’s companies and their workers even less competitive in the global economy than our tax system already makes them, and give an even bigger advantage to our trading partners.

PricewaterhouseCooper’s top international tax expert, Peter Merrill, testified last year regarding the uniquely uncompetitive tax situation that U.S. companies already face in global markets:

Unlike the United States, 28 of the other 33 OECD member countries, and all other G-7 countries, have adopted dividend exemption (so-called “territorial”) tax systems . . .

Under these territorial tax systems, the active foreign income of foreign subsidiaries generally is taxed only by the country where it is earned, and it can be distributed to the parent company with little or no residual taxation. . . .

There has been a pronounced shift over the last 25 years toward the use of territorial tax systems. In 1989, only 10 OECD member countries had territorial tax systems . . . Today, 28 OECD countries . . . have adopted some form of territorial tax system. Notably, over this period, only two OECD countries switched from territorial to worldwide tax systems (Finland and New Zealand) and both countries subsequently switched back to territorial tax systems.

As a result of these trends, U.S. multinationals now compete against foreign competitors that overwhelmingly are taxed under territorial systems. Within the OECD, 93 percent of the non-U.S. parented companies on the Global Fortune 500 list in 2012 were located in countries that use territorial tax systems.

The dominant view of corporate tax experts is that the United States should follow the lead of other major nations by slashing our tax rate and adopting a territorial system that does not tax active foreign business income. While it’s not true that what’s good for General Motors is necessarily good for the United States, in this case slashing our tax rate to, say, 15 percent and adopting a territorial system would be a big win for American businesses and American workers.

U.S. multinational corporations (MNCs) account for one-quarter of our private-sector GDP, about one-third of our private-sector capital investment, about half of our exports, and three-quarters of our private-sector research. The foreign operations of these MNCs generally complement their U.S. operations — the more successful are the foreign operations, the better it is for U.S. workers.

U.S. MNCs employ more than 20 million Americans and pay them 24 percent more, on average, than other U.S. companies pay. Americans who work for MNCs, such as Apple, Intel, and General Electric, are surely proud of their firms and want them to succeed in world markets.

In sum, U.S. multinationals are hugely important to American prosperity. So it is baffling that the Obama administration is so determined to punish them.

― Chris Edwards is director of tax-policy studies at the Cato Institute and co-author of Global Tax Revolution.

Chris Edwards is an economist at the Cato Institute. He recently testified before the House Oversight and Reform Committee about the USPS’s dire financial condition.

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