Barack Obama announced a plan to recover more than $200 billion a year by closing tax “loopholes” for American businesses that do business overseas. The loophole in this case mainly consists of closing out preferential tax treatment of income derived from foreign subsidiaries, which helps America compete abroad. Bringing those revenues under the domestic tax rate would not necessarily raise revenues, businesses warn, but create a flight of multinationals out of the US:
The White House argued that 83 of the 100 largest U.S. corporations have subsidiaries in tax havens, citing a government report, and that in 2004 the largest corporations paid about $16 billion, or a tax rate of about 2.3 percent, on $700 billion in profits.
The plan would raise $60 billion by 2019 by reducing the amount of foreign income that companies can avoid paying tax on indefinitely through a procedure called “deferral.” It would raise another $40 billion over the next 10 years by cracking down on inaccurate tax deductions made by U.S. companies based on taxes they pay in other countries. …
Fiscal conservatives and anti-tax groups countered that the Obama plan will produce the opposite of what it intends to do.
“Obama’s proposal will shove jobs and capital out of America and into foreign countries,” said Americans for Tax Reform, pointing out that U.S. companies already pay a higher corporate tax rate of 40 percent domestically than in many other countries, and that forcing them to pay this rate on profits they make internationally will drive operations out of the country.
“It’s a relatively simple matter for a U.S. company with an Irish subsidiary to become an Irish company with a U.S. subsidiary,” the anti-tax group said.
Unfortunately, Obama’s stuck. In the middle of a deep recession, Obama has proposed massive new government spending while revenues drop dramatically. The predicted $1.85 trillion budget for this year is a massive fantasy, and the rosy economic predictions for this year and next make the next few years’ deficit predictions seem even more ridiculous.
Obama has to find revenue to counter the bleeding. This attempt will backfire in a couple of ways. First, as ATR noted, companies with the wherewithal will simply move overseas to take advantage of better tax environments, limiting their exposure to Obama’s tax-hiking fever and protecting their revenues. He can try to make this as painful as possible, but in the end businesses will act in their own interest. Obama seems to either not realize this or not care much whether companies flee the US, nor does he appear to have learned the value of dynamic tax analysis.
For the rest, the high American corporate tax rate will cause them to invest less in their own businesses, killing expansion and development. It will curtail employment, and in the end, the businesses won’t pay most of the tax anyway. They will do what all businesses do — pass their internal costs to their customers in the form of higher prices. Those higher prices will depress demand, as well as creating inflation on top of stagnation. This will not only cripple the American economy in a similar manner to what we saw in the 1970s, but it will also mean less revenue for the federal and state governments.
If Obama wanted to create jobs and stimulate growth — and therefore tax revenue — he would drop the corporate tax rate instead of attempting to close this “loophole”. If we had a competitive tax rate, businesses wouldn’t need to go abroad to protect their revenue, and we could collect more in taxes in the long run. In order to realize that, though, Obama would have to be cured of his knee-jerk antipathy towards the private sector, which was perfectly clear in his announcement of this new policy.