Obama Administration Proposes another Business Tax that Would Cause Job Loss
September 30, 2009
by: John Frydenlund

Government WasteWatch, Fall 2009

As part of its budget, the Obama administration has proposed changing the rules governing the taxation of foreign earnings of U.S. companies by severely curtailing “deferral” of U.S. taxes on overseas profits.  This would impose more than $100 billion in new taxes on corporate foreign earnings.

This is just another idea from President Obama’s economic gurus that would undermine the economic recovery even as the president claims credit for moving it forward.  Either the Obama administration fails to recognize basic economic principles and grasp the devastating impact of the business tax proposal or else they are so thoroughly blinded by their knee-jerk dedication to punitive taxation and the demonization of corporate America that they just don’t care.

U.S. companies operating in the international arena already suffer from a competitive disadvantage.  The U.S. tax rate of 35 percent is the second-highest in the world, behind only Japan.  Also, unlike most other countries, the U.S. taxes worldwide earnings of U.S.-headquartered companies, not just their U.S. earnings.  However, in order to mitigate the ill-effects of the corporate tax rate and give American companies a chance to level the playing field, a U.S.-based company is not taxed on the active foreign income of its separately incorporated foreign subsidiary until those earnings have been paid, typically as a cash dividend to the parent company.  Generally, this tax deferral results in the U.S. subsidiary paying the same tax rate on its operations abroad as is paid by a foreign-owned subsidiary.  This makes it possible for U.S.-based international companies to compete against foreign-based companies taxed under either deferral or exemption systems.

Eliminating or curtailing the tax deferral makes no sense.  Most of the world is striving to make their companies more competitive.  Eliminating or curtailing deferral would move the United States in the opposite direction.  The new taxes would allow foreign-based competitors to reinvest more, expand faster, and sell their products at prices lower than their U.S.-owned competitors.

The ultimate result would be that U.S.-based international companies will be hamstrung in their ability to compete in international markets against foreign-headquartered corporations.  Lost sales would lead to job losses and lower wages for American workers and U.S. companies.

As Microsoft Chief Executive Officer Steven Ballmer stated in a June 3, 2009 Bloomberg News article, “It makes U.S. jobs more expensive.  We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”  Ballmer estimated that the higher taxes would reduce profits for companies comprising the Dow Jones Industrial Average by between 10 and 15 percentage points.

President Obama claims to care about American workers and American jobs.  But, with 95 percent of the world’s consumers outside the United States, U.S. companies must be able to compete internationally on a level playing field so they can serve these markets and increase jobs in the United States.  U.S. parent companies of worldwide American companies play a big role in generating jobs for American workers, employing nearly 22 million U.S. workers, which is almost 20 percent of the total U.S. private-sector workforce.

Hopefully, Congress will reject this nonsensical proposal to punish American companies.