Monday, September 27, 2010

Democrats continue their assault on the job creators

"You can't love jobs while hating the people who create them." Rep. Paul Ryan (R-WI), Joel Pollak endorsement speech, September 1, 2010.

Like many bad ideas, this one has the fingerprints of Sen. Dick Durbin (D-IL) all over it. In what is being called a jobs bill, the Senate is scheduled to vote on a bill that they will give payroll tax breaks to companies that replace jobs that have been outsourced outside the country.

Sounds good? Well, the US Chamber of Commerce opposes it, declaring it will lead to job losses. Instead, the Chamber says the Bush tax cuts should be extended--Congress has decided to punt the decision into the lame duck session.

But what the Democrats' bill will  is to raise taxes. The Wall Street Journal explains:

We're all for increasing jobs in the U.S., but the President's plan reveals how out of touch Democrats are with the real world of tax competition. The U.S. already has one of the most punitive corporate tax regimes in the world and this tax increase would make that competitive disadvantage much worse, accelerating the very outsourcing of jobs that Mr. Obama says he wants to reverse.

At issue is how the government taxes American firms that make money overseas. Under current tax law, American companies pay the corporate tax rate in the host country where the subsidiary is located and then pay the difference between the U.S. rate (35%) and the foreign rate when they bring profits back to the U.S. This is called deferral—i.e., the U.S. tax is deferred until the money comes back to these shores.

Most countries do not tax the overseas profits of their domestic companies. Mr. Obama's plan would apply the U.S. corporate tax on overseas profits as soon as they are earned. This is intended to discourage firms from moving operations out of the U.S.

The real problem is a U.S. corporate tax rate that over the last 15 years has become a huge competitive disadvantage. The only major country with a higher statutory rate is Japan, and even its politicians are debating a reduction. A May 2010 study by University of Calgary economists Duanjie Chen and Jack Mintz for the Cato Institute using World Bank data finds that the effective combined U.S. federal and state tax rate on new capital investment, taking into account all credits and deductions, is 35%. The OECD [Organization for Economic Co-operation and Development] average is 19.5% and the world average is 18%.
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