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



January 25, 2012

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

I wasn’t the only one left confused.

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

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

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

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

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

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

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

Currently, the United States is one of the few remaining nations to use a “worldwide” system that taxes business income earned outside national borders. The U.S. also has the distinction of having the second highest (soon to be the highest) corporate tax rate among OECD nations, and ranks and embarrassing 124th out of 183 countries worldwide in total tax rate faced by a typical corporation.

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

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

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

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-tech manufacturing”) while enacting a de facto tax hike on multinational firms. This is no way to encourage firms to bring their profits back to our shores, it’s a strategy that incentivizes companies to move off our shores altogether!

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


 

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