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Archive for September 28th, 2010

I’ve already commented on the Democrats deciding to wait until after the election before figuring out what to do about the 2001 and 2003 tax cuts. This was a remarkable development since failure to extend these pieces of legislation means a big tax increase next January. But this doesn’t mean the Democrats are sitting on their hands. The President has a proposal to significantly increase the tax burden on American companies that compete in world markets, and Democrats on Capitol Hill think this is a winning political issue. They think higher taxes will encourage companies to keep more jobs in America, and they hope voters agree. But as the Wall Street Journal opines, this is a recipe for undermining the competitiveness f American companies. This means fewer jobs, and probably less tax revenue.

…the President’s plan reveals how out of touch Democrats are with the real world of tax competition. The U.S. already has one of the most punitive corporate tax regimes in the world and this tax increase would make that competitive disadvantage much worse, accelerating the very outsourcing of jobs that Mr. Obama says he wants to reverse. At issue is how the government taxes American firms that make money overseas. Under current tax law, American companies pay the corporate tax rate in the host country where the subsidiary is located and then pay the difference between the U.S. rate (35%) and the foreign rate when they bring profits back to the U.S. This is called deferral—i.e., the U.S. tax is deferred until the money comes back to these shores. Most countries do not tax the overseas profits of their domestic companies. Mr. Obama’s plan would apply the U.S. corporate tax on overseas profits as soon as they are earned. This is intended to discourage firms from moving operations out of the U.S. …Mr. Obama believes that by increasing the U.S. tax on overseas profits, some companies may be less likely to invest abroad in the first place. In some cases that will be true. But the more frequent result will be that U.S. companies lose business to foreign rivals, U.S. firms are bought by tax-advantaged foreign companies, and some U.S. multinational firms move their headquarters overseas. They can move to Ireland (where the corporate tax rate is 12.5%) or Germany or Taiwan, or dozens of countries with less hostile tax climates. We know this will happen because we’ve seen it before. The 1986 tax reform abolished deferral of foreign shipping income earned by U.S. controlled firms. No other country taxed foreign shipping income. Did this lead to more business for U.S. shippers? Precisely the opposite. According to a 2007 study in Tax Notes by former Joint Committee on Taxation director Ken Kies, “Over the 1985-2004 period, the U.S.-flag fleet declined from 737 to 412 vessels, causing U.S.-flag shipping capacity, measured in deadweight tonnage, to drop by more than 50%.” …Now the White House wants to repeat this experience with all U.S. companies. Two industries that would be most harmed would be financial services and technology, and their emphasis on human capital makes them especially able to pack up and move their operations abroad. CEO Steve Ballmer has warned that if the President’s plan is enacted, Microsoft would move facilities and jobs out of the U.S.

I’ve commented on this issue before, but I think the best explanation is in this video, which makes the key observation that American tax law may be able to discourage U.S. firms from building factories in other nations, but that simply means that companies from other countries will be able to take advantage of those opportunities.

A lot of Democrats, at least in private, admit that going after “deferral” is bad policy. But this makes the current proposal especially disgusting. People in the White House and on Capitol Hill know it will hurt jobs and reduce competitiveness, but they don’t care. Or at least they put political ambition before doing what’s right for the American people.

If they really cared, the would fix what’s wrong with the current system. A very effective way to encourage more jobs and investment in America is to lower the corporate tax rate, which is the point I made in the Center for Freedom and Prosperity’s first video.

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I always view polling data with a bit of skepticism, but I’m nonetheless embarrassed by new data from a 22-nation poll showing that German and French respondents are even more opposed to so-called stimulus spending than American respondents. If Americans are to the left of Europeans on size-of-government issues, that does not bode well for our future. On the other had, at least we’re not as naive and/or stupid as Egyptians, Mexicans, Russians, Indonesians, and Nigerians. Here’s a blurb from the summary.

In 14 of 22 countries most people–on average 56 per cent–favour an increase in government spending to stimulate the economy. This includes large majorities of Egyptians (91%), Mexicans (80%), Russians and Indonesians (both 78%), and Nigerians (73%). But majorities are opposed in a number of industrialised countries that had large stimulus programmes–Germany (66%), France (63%) and the US (58%).

The good news from the poll is that a majority of people around the world recognize that governments waste money at alarming rates. Americans think that 55 percent of their taxes are squandered. The Spanish, for inexplicable reasons, are most likely to think money is not wasted (perhaps because most of them have their snouts in the pubic trough?).

People believe that their government misspends more than half the money they pay in tax, according to the findings of a new BBC World Service global poll across 22 countries–but many are still looking to government to play a more active economic role. The poll of more than 22,000 people, conducted by GlobeScan/PIPA, found that people estimated on average that 52 per cent of the money they pay in tax is not used in ways that serve the interests and values of the people of their country. …The countries with the lowest average estimate of misspent tax money were Spain (average 34% misspent), Indonesia (40%), Azerbaijan and Egypt (both 42%). The highest were in Columbia (74% misspent) and Pakistan (69%). In the world’s two largest economies, Americans estimate on average that 55 per cent of their taxes are misspent, while in China the figure is 46 per cent. …As well as being less likely to support action to address the deficit, those who have the highest estimates of tax misspending are less likely to support government stimulus spending–among those who think that more than three-quarters of their tax money is misspent, only 47 per cent believe the government should spend to stimulate the economy.

The full report can be read here.

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