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Obama's Attack of the Imaginary "Outsourcing Tax Break" Could Have Real Consequences

by Brandon Greife / /

Like many I watched the State of the Union last night. I’vealso read it. And reread it. But for the life of me I still can’t figure outwhat President Obama was talking about when he said, “It is time to stoprewarding businesses that ship job oversees.”

I wasn’t the only one left confused.

“The truth is that not even Mitt Romney’s tax accountantcould get him a tax write off for moving jobs to Bangalore. So what I the nameof Warren Buffet’s secretary could Obama possibly mean,” wroteShikha Dalmia of Reason.

And it’s not as if this was just a one-liner that some youngspeechwriter through in there just to play up the populist angle. Obamarepeated it over, and over, and over.

“Right now, companies get tax breaks for moving jobs andprofits overseas.”

“If you’re a business that wants to outsource jobs, youshouldn’t get a tax deduction for doing it.”

“No American company should be able to avoid paying its fairshare of taxes by moving jobs and profits overseas.”

“It is time to stop rewarding businesses that ship jobsoverseas.”

Unfortunately for Obama saying something a bunch of timesdoesn’t make it true. The fact is, no such tax break exists. Indeed, the onlything that I can think of that Obama may be referring to isn’t a tax break atall, it’s a clumsy attempt to prevent America’s corporate tax code from beingworse than it already is (which is pretty bad).

Currently, the United States is one of the few remainingnations to use a “worldwide” system that taxes business income earned outsidenational borders. The U.S. also has the distinction of having the secondhighest (soon to be the highest)corporate tax rate among OECD nations, and ranks and embarrassing 124thout of 183 countries worldwide in total tax rate faced by a typicalcorporation.

Those two facts mean that a U.S. based company that earnsincome in say, France, would pay the French rate, then turn right around andpay the U.S. rate on top of it. Not exactly a formula for success. To try andalleviate the burden, Washington came up with an overly complicated system bywhich we maintain our “worldwide” scheme but allow companies to only pay thedifference between the U.S. rate and the tax they’ve already paid as well as delaythat tax payment until they bring the money back to the U.S. (repatriate it).

This creates the odd incentive for businesses to leave theircash overseas rather than bring it home to invest, hire, or heck, even hand outin dividends.

It’s a complicated, mish-mash of a system that is ill-suitedfor the global marketplace. President Obama is right to cheerlead for itsreform. But reform shouldn’t mean making it even more complicated and even moreuncompetitive.

Sadly, that’s exactly what Obama sounds like he wants to do.Rather than reform the system to lower the rate and eliminate loopholes,President Obama wants to create more loopholes for certain favored industries (“high-techmanufacturing”) while enacting a de facto tax hike on multinational firms. Thisis no way to encourage firms to bring their profits back to our shores, it’s astrategy that incentivizes companies to move off our shores altogether!

Hopefully, Obama will read, and reread, this post until hefigures that out.