In last night’s State of the Union address, President Obama repeated one of his favorite assertions that “companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world.”
Well, he’s half right.
It’s true that American companies pay the highest corporate tax rate among developed economies. That’s stupid, counterproductive and perhaps the single biggest factor behind our poor economy and lagging global competitiveness.
But it’s not true that companies get a “tax break” for moving jobs offshore. There is no line item in the U.S. code that lets companies take a tax deduction for the number of jobs they moved overseas that year.
If we’re going to heal the U.S. economy, we’d better make sure we’re making the correct diagnosis, and treating the cause rather than the symptom. The symptom is jobs created overseas and profits held offshore, but the cause is our absurdly high corporate tax rate coupled with our outdated worldwide tax system.
U.S. companies pay the foreign taxes of the country they operate in. For most countries, which have a territorial tax system, the tax obligation ends there. But the U.S. maintains a global tax system: if foreign taxes are lower than their U.S. taxes, the companies have to pay the difference to the U.S. government. Because the U.S. corporate tax rate is much higher than our international competitors, it acts like a one-two punch purposely designed to drive jobs and profits overseas, and to advantage foreign competitors over U.S. companies.
The president’s solution is to impose a minimum tax on all companies, which is exactly the opposite of what we should be doing.
U.S. multinationals are doing careful analysis and making rational decisions about where to site plant, equipment and workers based on a tax system that penalizes rather than benefits them. Lowering the corporate tax rate and instituting a territorial tax system will create a level tax playing field with other countries. The solution is simple, but the impact will be profound.
January 25, 2012