Start with the widely believed notion that American companies are ferociously shifting jobs abroad. This is an exaggeration. Of course, some jobs have been lost as a result of the growing trade deficit, now roughly $500 billion. But the trade deficit mainly reflects faster economic growth in the United States than abroad and the dollar’s high exchange rate. Both hurt U.S. exports and spur imports. As foreign economic growth improves and the dollar drops, the trade deficit should stabilize or decline.
What’s untrue is that American multinationals–those with operations here and abroad–have progressively abandoned the United States for locations with lower wages or lower taxes. Interestingly, American multinationals are almost as rooted in the United States now as a quarter century ago. Here’s what the data from the Commerce Department show:
It’s a myth that companies like IBM, General Electric or Microsoft are (as it’s often said) “stateless.” To be sure, their vast global interests often create conflicts between what’s good for companies and what’s good for America. But the larger reality is that their success (or failure) remains strongly connected to the success (or failure) of the U.S. economy.
The precise reasons for this stubborn attachment to the United States aren’t clear. These companies do shut U.S. plants. They are growing abroad. Indeed, foreign-job increases are higher in percentage terms, because they start from a smaller base. But numerically, job growth is still greater in the United States. From 1992 to 2002, U.S. multinationals added about five American jobs for every three foreign jobs. Perhaps these companies succeed simultaneously at home and abroad. But expansion abroad–motivated by low wages or closeness to growing foreign markets–may also create U.S. jobs, concludes economist Matthew Slaughter of Dartmouth in a study for the Coalition for Fair International Taxation, a group of multinational firms. He says that growing foreign activity may require more U.S. scientists and engineers, financial specialists and managers.
Still, wouldn’t Kerry’s plan shift jobs to the United States? Probably not.
First, some background. Under U.S. tax law, American multinationals receive a tax credit (a dollar-for-dollar offset) for foreign taxes they’ve actually paid. They can also defer paying any more U.S. taxes on foreign profits until those profits are repatriated–that is, returned–to the United States. Although this seems generous, it’s not generous compared with what many countries (say, France or Germany) do. They don’t tax the foreign profits of their multinational firms at all. As a result, many U.S. companies keep foreign profits abroad to minimize their U.S. taxes and stay competitive with foreign rivals. Unrepatriated profits have accumulated to more than $600 billion.
What Kerry proposes is lowering the U.S. corporate tax rate from 35 percent to 33.25 percent–and limiting the ability of U.S. multinationals to defer taxes on future foreign profits. The idea is to discourage U.S. companies from moving operations to countries with lower corporate tax rates. But the practical effect would be to put U.S. multinationals at a disadvantage with many foreign multinational firms, whose taxes would be lower. A study by the Institute for International Economics, a think tank, suggests that the Kerry proposal would inspire massive efforts at evasion or cutbacks in U.S. operations abroad–which, if Slaughter is correct, could hurt U.S. job growth. The plan’s basic defect is that it barely lowers the cost of operating in the United States; it mainly increases the cost of operating elsewhere. American companies might do less abroad without doing much more at home.
But Kerry’s onto something. The corporate tax is a monstrosity. It promotes widespread tax avoidance, raises a diminishing amount of governmental revenue and discourages efficiency. It’s an exercise in cynicism and waste that the next president ought to overhaul.
