Business Community Upset by Obama’s New Tax Proposal
By Alan Stewart Carl | Related entries in Business, Taxes
President Obama’s plan to crack down on what he considers to be overseas tax shelters is already creating a lot of backlash from the business community. The main complain? Taxing overseas profits will directly harm American jobs.
[Martin Regalia, chief economist at the U.S. Chamber of Commerce] said the ability of companies under current tax law to defer tax payments on overseas profits — a provision Obama wants to undo — was enacted intentionally so U.S. companies could avoid double taxation by the United States and the foreign countries in which they do business.
“The deferral was instituted as a way to address or remove some of the imbalances between the U.S. tax system and our foreign competitors’ territorial tax system,” Regalia said. “This was put in knowingly. It wasn’t sneaked in. It wasn’t a loophole. So if you take it away or reduce its value, you’re going to reinstitute the competitive imbalance between U.S. multinationals and their foreign competitors.”
And, the argument goes, if American companies can’t compete overseas they will shrink in size and end up laying off Americans.
What Obama wants to combat is the outsourcing of jobs overseas. By forcing American corporations to pay taxes on the profits they make from, say, a call center, the president hopes companies will think twice before moving those jobs out of the U.S. Also, he’s looking for a way to raise more revenue for his endless list of plans and apparently thinks he can get this through Congress.
Of course, the problem is, the market tends to get what the market wants. If American companies can’t afford to fill a market segment (either at home or abroad), a foreign company could quickly fill the void. As such, the business community has a very reasonable complaint here and I expect a fair number of conservative Democrats will think twice before upsetting the U.S. Chamber of Commerce. We’ll see.
This entry was posted on Wednesday, May 6th, 2009 and is filed under Business, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
May 7th, 2009 at 2:00 am
A simple and contempory example of why the Chamber is right about this is this:
If the Chrysler-Fiat merger becomes operational and by virtue of its investment in the US company, Fiat makes money in the US (which it will do mainly by selling Fiats and Jeeps, if at all), it will pay US taxes on that money but pay no taxes in Italy on the same money.
If however, GM is rescued from oblivion, continues to run its profitable businesses selling cars overseas, one of which is Opel, a brand that sells well in Europe, any money that GM makes on its European Opels (and other car sales there) will be taxed by Germany, Italy, etc. and then taxed again by the U.S.
This has nothing to do with keeping business from “sending jobs overseas” like call centers and what not. Its main effect will be to hamper US companies ability to compete in Europe, China and elsewhere.
The problem of “exported jobs” is mostly a trade issue. If we want to keep jobs making textiles, apparel, steel or consumer electronics in the US, we need to slow the importation of these products from abroad by erecting tariffs or other barriers. Obama’s tax plan won’t save these jobs. Whether it’s a good idea to curb imports is a harder question — one that Obama is as lwary of dealing with as any of his predecessors, Republicans and Democrats alike.
May 7th, 2009 at 7:36 am
I just want to throw something out there, as I haven’t heard anyone broach this idea, and I figure there must be some obvious flaw with it that I’m not seeing.
Business income tax should work like sales/use tax.
Businesses should pay the local rate OR the US rate, whichever is higher. (If the local rate is higher, pay that. If the local rate is lower, pay that *and* the delta between the local rate and the US rate)
I live in Virginia, where the sales tax rate is 5%. If I go to Delaware (sales tax: 0%) and buy a car, I pay DE nothing… but I pay VA the 5% I would’ve paid if I’d bought it there. If I tried the same thing in Tennessee (TN: 7%), I don’t pay anything more to VA (nor do I get 2% back, sadly.)
Say GM sells a car here, and the tax on profit is, say, 25% (I don’t actually know what the number is). If they go to Italy and sell a car and the tax there is, say, 35%, they don’t pay the US a dime. Any cars they sell in Bermuda, though, where the sales tax is 0%, they pay the US what they would’ve paid had they sold the car here in the states.
Am I oversimplifying?
cy
May 7th, 2009 at 11:00 am
That seems reasonable.
May 7th, 2009 at 12:09 pm
Memorize the words “capital flight.”
This will not raise even remotely the amount of tax revenue claimed. It will however encourage American companies to relocate overseas to get away from some of the highest corporate tax rates in the developed world. Guess how that will affect jobs?