There has been enormous campaign rhetoric on tax incentives to offshore outsource American jobs. But can corporate tax policy alone really do much?
Firstly, what are Politicians even talking about? When corporations keep profits in a foreign country, they don't pay taxes on that money in the United States. A reasonable explanation:
At issue is the U.S. tax code's treatment of profits earned by foreign subsidiaries of American corporations. Profits earned in the United States are subject to the 35% corporate tax. But multinational corporations can defer paying U.S. taxes on their overseas profits until they return them to the USA — transfers that often don't happen for years. General Electric, for example, has $62 billion in "undistributed earnings" parked offshore, according to recent Securities and Exchange Commission filings. Drug giant Pfizer boasts $60 billion. ExxonMobil has $56 billion.
"If you had two companies in Pittsburgh that both were going to expand capacity and create 100 jobs, our tax code puts the company who chooses to put the plant in Pittsburgh at a competitive disadvantage over the company that chooses to move to a tax haven," says former White House economist Gene Sperling, a Clinton adviser.
Any plans for a tax code change are like trying to plug a hole in a leaky dam with your finger—to believe the U.S. government tax code promotes outsourcing is a major misconception of the fiery debate around outsourcing offshore
FactCheck.org also points out the minor effects:
To start, the Obama campaign is referring to a long-standing aspect of the federal tax code that allows U.S.-based multinational corporations to defer paying U.S. corporate taxes on profits made overseas if the profits are left there, too.
McCain cast three votes against amendments to budget and spending bills that the amendments' Democratic sponsors said were intended to address this, in 1995, 2004, and 2005.
But this tax provision isn't the main reason companies decide to set up shop abroad.
Back in 2004 when we criticized John Kerry for using a similar iteration of this claim against President Bush, we pointed out that Christian Weller, a senior fellow at the Democratic-leaning Center for American Progress, had said taxes "are a very small part" of companies' decisions to move jobs offshore. Those at a 2005 Brookings Institution summit on trade also said taxes had little to do with outsourcing. Joel Slemrod, a tax expert at the University of Michigan's business school, summed it up by saying: "For those who see [offshoring] as a problem, this is not a solution."
While I cannot argue that before these votes on the most wrongly titled American Jobs Creation Act of 2004, corporations were in droves firing Americans and moving jobs offshore, it is quite clear that our corporate tax code is riddled with loopholes and bad incentives which has been well documented by David Kay Johnston.
In a 2005 study by Kimberly Clausing, Brookings Institution on corporate tax codes, the author concludes differently. Modification of the corporate tax code to remove incentives to offshore outsource jobs will have some effect. Clausing shows that indeed, international corporate tax law does encourage corporations to move jobs and capital offshore.
But, removing incentives does not mean stop outsourcing which unfortunately many confused folks (and it's real easy to be confused on international corporate taxes!) believe.
Yet the GAO found:
The average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2 percent. There was considerable variation in tax rates across these taxpayers, [see link for figure]. The average U.S. effective tax rate on the foreign-source income of these large corporations was around 4 percent, reflecting the effects of both the foreign tax credit and tax deferral on this type of income. Effective tax rates on the foreign operations of U.S. MNCs [multinational corporations] vary considerably by country. According to estimates for 2004, Bermuda, Ireland, Singapore, Switzerland, the United Kingdom (UK) Caribbean Islands, and China had relatively low rates among countries that hosted significant shares of U.S. business activity, while Italy, Japan, Germany, Brazil, and Mexico had relatively high rates.
Note that Mexico has high rates and we import their labor overflow through illegal workers and their wages are still repressed in spite of the promise(sic) of NAFTA.
So, in other words the GAO found that tax deferral by keeping jobs, profits capital offshore is a major factor. But changing this would it actually curtail offshore outsourcing?
With a international wage ratios of 100:1, 10:1, 30:1, corporations are going to go where they can maximize profits. Enabling corporations to squeeze workers/labor costs will probably continue, especially if other policy areas, such as trade are not modified or if policies to give tax breaks to companies who hire U.S. citizens first for jobs in this country are not enacted.
8% of IT jobs have already been offshore outsourced and Economist Alan Blinder has warned 40 million jobs are offshorable and most high level research and development jobs in Science, Technology, Engineering and Mathematics occupations are at risk.
The CBO also found distortions in the corporate tax rate, again motivated by deferring money offshore.
So, what's the bottom line here? Well for one, more blog posts by myself and hopefully others wading through the corporate tax code swamp, analysis and research, but for now, if one wants to promote jobs in the United States for U.S. citizens, at best removing incentives for multinational corporations to keep profits, jobs, capital offshore is just one piece to a very large international global economic multidimensional puzzle.
corporate tax rates
Just to even further confuse you, what corporations really pay due to so many loopholes versus what the corporate tax rate is are two different things. Some evidence on that is how the United States only pays about 2.2% GDP in corporate taxes.
tax revenue as percentage of GDP
Taxes and GDP %
The Big Picture also has a well referenced post on international tax rates.
Bear in mind the above images are total tax revenues, not just corporate taxes.
Finally, a few facts on the difference between statutory corporate tax rates versus what multinational corporations really pay.