The Obama administration keeps coming forward with proposals that would undermine the economic recovery even as it claims to be trying to save it.  At least $1 trillion has been spent to supposedly “stimulate” the economy and the budget deficit is at a record level.  Yet, the economic gurus within the executive branch have floated another proposal that is both incongruous and counterproductive.

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

Either the Obama administration fails to fathom basic economic principles and grasp the devastating impact of such a 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, Congress has included a provision in tax law designed to allow American companies to better compete with their foreign competitors.

This provision, known as “deferral,” means that 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, 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 stated clearly by Microsoft Chief Executive Officer Steven Ballmer, “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 that comprise the Dow Jones Industrial Average by between 10 and 15 percentage points.

President Obama has certainly tried to portray himself as caring about American workers and American jobs.  If he really does, he needs to recognize that 95 percent of the world’s consumers live outside the United States.  In order for U.S. companies to serve these markets and increase jobs in the United States, they must be able to compete internationally on a level playing field.  President Obama needs to recognize the role that U.S. parent companies of worldwide American companies play in generating jobs for American workers.  These companies employ nearly 22 million U.S. workers, which is almost 20 percent of the total U.S. private-sector workforce.

President Obama can demonstrate that he means what he says about creating more jobs by withdrawing his nonsensical proposal to punish American companies.    

- John Frydenlund