How About Those Tax Breaks?
A major theme in Obama ads is the accusation that McCain support “tax breaks for shipping jobs overseas” and that Obama will “end them”. What exactly is this tax break? To listen to the Obama campaign you would think that there is a line on the corporate tax forms labeled “How many jobs have you shipped overseas” with a multiplier to make a tax break.
You will not see that line on a corporate tax form. What the Obama campaign is referring to is a policy called “deferral”. Deferral allows corporations to defer paying taxes on profits earned and being used overseas. Taxes are paid when (sometimes if) those profits are “repatriated”—i.e. brought back to the United States. If I read the information correctly, this provision has been around since the early 1960’s.
Obama is simplifying here. This is understandable, but we really need to know a couple of things. First, are these “tax breaks” actually causing jobs to go overseas? Second, what does he mean by ending these “tax breaks”? Third, what would be the implications of ending these “tax breaks”?
The answers below the fold:
According to the Tax Foundation (from a Department of Labor pdf report) the answer is “no”. In 2006 they reported that only 1.4% of ALL workers laid off in mass were done so to relocate their jobs overseas. Almost twice that number was laid off to relocate their jobs to other states domestically. By the way, in 2006 that number amounted to just over 13,000 jobs “shipped overseas”.
Regarding what Obama wants to do about this “tax break” is unclear. His website only says that they want to eliminate the “deduction”. In 2004, John Kerry suggested limiting the deduction by taxing money on goods and services produced overseas by U.S. corporations that were brought back into the United States. This sounds quite unwieldy, but plausible. Someone from the Cleveland Plain Dealer contacted the Obama campaign and got a platitude that “Obama would work with the Treasury Department and Congress to design a reform.” The only proposal that I have found so far is floated by the Tax Policy Center (which is the Urban Institute and Brookings Institution) which call for complete elimination of deferral, though it does call for a lowering of the marginal tax rate.
What would Obama do? Who knows? My guess is that his refusal to say what he favors and how prominently this issue plays in his campaigning indicates that his position may be further out than the Tax Policy Center. By which I mean, that eliminate the deferral and not change the tax rate.
What would be the impact of such a policy? The Cleveland Plain Dealer article referred to above quoted a couple of different sources describing implications. Mr. Josten of the U.S. Chamber of Commerce says the policy would put U.S.-based companies at “a huge tax disadvantage”. He then observed that this type of policy in the “middle of a recession” would be very bad for jobs. But Eric Toder from the Tax Policy Center and a former Treasury official in the Clinton administration observed that it might negatively affect U.S. exports:
But there’s also evidence, he said, suggesting that U.S. exports could suffer if U.S. firms face higher taxes on profits earned by their foreign subsidiaries and therefore scale back their overseas operations. Foreign subsidiaries of U.S. firms, he said, often buy parts from manufacturers in the United States.
By the way, even CNN’s fact checker finds the Obama attacks on McCain supporting sending jobs overseas “misleading”. That is the kindest word for this. Obama is attacking and hiding all in the same process. This is why it is telling for me to know with whom Obama allies himself.
October 30th, 2008 at 11:54 am
Interesting take on Obama’s tax policies here. It’s great to see bloggers keeping their attention on the economy as we approach next week’s election. It is, without a doubt, an important and complex issue facing our country right now. Here at Public Agenda we’ve put together an informative, non-partisan guide that focuses on the facts and the plethora of perspectives surrounding the economic debate in America, including where the candidates stand on these issues. Be sure to check it out at http://publicagenda.org/citizen/electionguides/economy and feel free to contact us with any questions. The federal deficit clock is at $10.3 trillion, and is still ticking – learn more about taxes, spending and the national debt by also visiting http://publicagenda.org/citizen/electionguides/taxesdebt.
October 30th, 2008 at 10:16 pm
The policy of deferral was established expressly because we wanted to encourage companies to engage in international investment.
The original argument still makes sense. If we encourage international trade, we’re discouraging international tensions. You don’t start wars with someone if they are a good customer, nor do you start wars with someone if they are an important supplier. That’s the REAL way to combat terrorism - make it profitable for the terrorist to be peaceful, and ruinously expensive for him to be a terrorist.
The problem - and I will admit it’s a problem - with jobs going overseas is that we tax income, and other companies tax outgo. That is, most countries have a value-added tax.
If we ship a product to some other country, we tax the production once, and then the other country taxes the product again. That makes us less than competitive.
If they produce a product and ship the product out of the country, all the VAT is rebated to the exporter. We then allow the product to enter our marketplace, and the only tax that’s imposed is on the retailer’s profit. That is, the dealer will pay taxes only on the $500 markup when they sell you a Toyota pickup made in the orient, so it’s a lot more competitive than a locally-manufactured truck.
If a truck made in GM’s Fort Wayne plant is shipped to a foreign land, we don’t rebate the various taxes paid by GM and by the GM employees, and when it arrives and is sold for $25,000, the entire $25,000 is subject to VAT. That keeps the Indiana truck from successfully competing overseas.
The REAL answer is to adopt the VAT instead of having an income tax. That way, there will be no good reason to build factories overseas. American labor is more expensive than foreign labor, but it’s also a lot more productive.
And as a side benefit, a VAT is a lot easier to administer than an income tax. You don’t worry about whether something is earned or unearned income, whether it’s the result of short-term or long-term investment, and companies will be able to use whatever depreciation scheme makes sense to give investors a lucid view of their operations, without worrying about tax consequences. Instead, you simply worry about the selling price. You charge VAT on that, and remit the VAT to the government, minus the VAT that you were charged on components used in whatever you’re selling.
October 30th, 2008 at 10:45 pm
But Harl, you can’t control your citizen’s behavior as well with a VAT and you would put thousands of tax accountants out of business!
I largely agree, however there are many State issues that come up with complete elimination of income taxes. That isn’t necessarily a reason not to implement a VAT, but it does complicate it.
But the ultimate point here is that the elimination of this “tax break” would be very bad for the economy.
October 31st, 2008 at 8:41 am
“If we ship a product to some other country, we tax the production once, and then the other country taxes the product again.”
Last time I read the US Constitution export taxes are forbidden.
“you can’t control your citizen’s behavior as well with a VAT”
Which goes to show the US tax system is not a revenue generation system it’s a social engineering and vote buying scheme.
October 31st, 2008 at 8:55 am
Harl’s point is that we tax a product by taxing the profits (income) of the domestic company that manufactures the good. Of course, the company has to price into their product the taxes that they will pay on those profits. So it is an indirect tax on the exported products. This, combined with the VAT overseas and the deferral process domestically, encourages a multi-national company to manufacture their goods overseas when they are selling them overseas even if the costs of manufacturing are the same in both places.
Michael, my comment on controlling behavior was grounded in the reality that you point out. But compared to individual income taxes, the corporate tax structure is FAR more controlling. For instance you have both Obama and McCain voting for “big tax breaks” for “Big Oil” that also increased their tax burden. Of course the actual tax rate was never changed, but rather it was a series of deductions and fees, etc. that were intended to control behavior.
Our tax system is ugly. I would love for a Presidential candidate to print out the tax code–all of it–and bring it to a debate and put it on the table in front of him. Of course, you wouldn’t be able to see the candidate.
October 31st, 2008 at 9:32 am
Joel - didn’t Reagan do that at a debate? I can’t recall if it was a printed copy of the budget or the IRS tax code but it was a huge stack of paper.
VAT is nothing more than a glorified sales tax, and we have that already. Items purchased for resale are sales tax exempt. Only overseas that sales tax is somewhere in the vicinity of 15% to 25%. That’s what the Neal Boorz “Fair Tax” crowd is calling for is repeal of the 16th Amendment and adopting a nationwide sales tax, which is really a VAT.
October 31st, 2008 at 10:34 am
I’m sure Harl will pipe in on that. I think there are subtle differences between a VAT and sales taxes. I don’t really care about the differences as it seems eons away from happening simply because the government is unwilling to give up the control that they get via the income tax codes. If Obama wins and implements many of his proposals, the tentacles of government will be even further into corporate behavior through the tax code.
I personally think that the flat tax is a far easier proposal to get passed. If it could be done in conjunction with corporate taxes, it would go a long way to free up our economy. It is more doable. It does not, however, fix the double taxation that Harl points out.
But the printed out code thing sounds like a Reagan thing to do. I don’t remember that, but I was not into watching debates in those days. If true, that would just be another reason to like him. I do remember the stack of telegrams in front of Ollie North in the Iran Contra hearings. That was for a different purpose, however.