Our friend Dan Mitchell at the Center for Freedom and Prosperity has taken a look at Barack Obama’s plan to “close loopholes” on American business taxes from overseas profit, and concludes that this could be as damaging to the economy as anything this administration has yet done. He calls the existing taxes on foreign revenues a “discriminatory” tax, one that already puts American business on a poor competitive footing abroad. The new effort will make that exponentially worse:
Mitchell says that a principled taxation policy would limit itself to territorial taxation, ie, the nation where the income gets realized gets to collect the tax. After all, the income gets realized in that nation, and the rationale for business taxation is that one needs to repay the structure that allows businesses to operate within an enforced rule of law. The American government doesn’t provide that structure in Ireland, the Netherlands, Hong Kong, or the Cayman Islands, the latter of which prefers to allow businesses to keep their revenue in return for providing jobs to its citizens.
Even beyond principle, however, the new policy means that American businesses will pay a high penalty for being American. Using Dan’s example, a business based in the US would pay more than three times as much tax on its international business than one on the Netherlands. It won’t take much more than a year or two of those kinds of losses before the business begins looking for Amsterdam offices instead of New York digs.
Even if they don’t, who pays for those taxes in the end? Not the businesses; businesses pass costs along to consumers and labor in higher prices and job reductions. As prices go up, the businesses become less competitive in the markets both here and abroad, and consumers make other choices that fit their budgets. Result: American businesses fold, and imports and trade deficits increase.
It’s basically a Smoot-Hawley for the era of globalization. We’re going to see capital flight out of the US, and some nation with sensible policies will become the next center of high finance. If the Brits won’t wise up, it could be Ireland or the Netherlands, but if this keeps up, it won’t be New York for much longer.