Obama's overseas tax reach could cost American jobs

Barack Obama's quest for higher taxes isn't just a domestic operation. The president is looking at taxing the revenue American firms earn overseas.

On the surface that sounds fair.

But remember, businesses create jobs, businesses create wealth.

Here's how The Economist viewed Obama's proposal in May:

As a "downpayment" on a "simpler and fairer and more efficient" tax system, which would also raise $210 billion over ten years, Mr Obama promised tighter rules on the taxation of businesses' foreign earnings and a crackdown on the use of tax havens. He wants to make it harder for multinational firms to shift income to subsidiaries in low-tax countries, stiffen the rules on the credits American firms can claim for the foreign taxes they pay, and limit how much companies can defer tax payments on their foreign earnings. Under today's rules American firms do not pay tax on profits earned abroad unless those profits are repatriated. Mr. Obama wants to roll back this "deferral" by allowing firms to deduct the cost of investments abroad from their tax bill only once they have paid taxes on foreign profits. He has also vowed to get tough with individuals who park funds in tax havens to avoid American tax, and proposes an extra 800 inspectors to root out the scofflaws.

If the goal is to improve the tax code, this grab-bag of measures is deeply disappointing. No one doubts that America's corporate-tax system is a Byzantine mess of high statutory rates and oodles of exemptions. But much of that complexity is caused by the divergence between America's system of taxing its firms (and citizens) on their worldwide income and the territorial system used by most other countries. Mr. Obama's proposals, particularly his partial reversal of firms' ability to defer taxes, would add yet more complexity. Nor is there much evidence that they would boost domestic job creation, as the administration claims. In fact, by raising the tax bills of American firms and putting them at a disadvantage beside their foreign peers, Mr Obama's tax changes may reduce domestic job creation and even induce companies to move offshore.

In truth this plan is less an economic downpayment than a political one. Mr Obama needs more tax revenue, and corporate America’s foreign profits are an appealing pot of cash—particularly since Congress seems set to reject the administration’s other (sensible) plan to reduce tax deductions for richer folk. This week’s tough line may also be a useful bargaining chip with business. But the rhetoric is unconvincing. George Bush confused tax cuts with tax reform. Mr Obama seems to think reform lies in a tax crackdown; but he is wrong, too.

John John Castellani, president of Business Roundtable, expressed similar sentiments in a column for today's Richmond Times-Dispatch:

The Obama administration now wants to change the international tax rules in a way that will give foreign competitors an unfair advantage over U.S. companies in the global marketplace, allowing the foreign companies to reinvest more, expand faster, and sell products at lower prices. The administration claims it is protecting Americans against companies that export jobs; in reality, the proposal would put the U.S. increasingly out of sync with the rest of the world.

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The administration's proposals, however, threaten to inhibit economic growth and slow job creation here at home.

Among the world's leading industrial countries only one -- Japan -- has a higher corporate tax rate than America. Japan, unlike the United States however, does not tax the worldwide income of Japan-based corporations. Those companies pay taxes only in the countries where the income is earned.

The U.S., by contrast, expects its overseas companies to pay taxes in a country -- say, Germany -- where the income is earned and to pay an additional tax in the United States. This puts American companies at a significant disadvantage. If worldwide American companies are hit with a big tax hike, as the administration proposes, it will undoubtedly impact job security for the millions of U.S. workers who support their companies' overseas operations.

“Higher taxes will also stifle future job growth -- and job creation is a necessity in turning around our economy.

And finally...

The fact is, U.S. corporations already face an uphill battle because our tax code is out of step with those of our competitors abroad. To restore growth and job creation, the United States must have a competitive tax system that puts its major employers -- America's worldwide companies -- on equal footing with the rest of the world.

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