Wednesday, May 06, 2009

Tax “Equalization”: Making Sure American Companies Fail Overseas?

In the name of tax reform, Pres. Barack Obama has announced $190 billion of tax hikes on many of the biggest U.S. employers. By reducing after-tax profits, these tax hikes could hammer stock prices that reflect investor expectations of future profits…The stocks of these companies are in millions of portfolios held by individual investors, mutual funds, and pension funds, as well as endowments at colleges, hospitals, museums, and other institutions. Obama’s business-tax hike will hit Americans whose jobs and pensions depend on these companies’ success — particularly in tough times. Colleges will have a harder time keeping tuition affordable if Obama hammers their portfolio holdings, and hospitals will be under more pressure too….Obama claims his tax hikes will “level the playing field.”…He wants all U.S.-based companies to be fully subject to U.S. business tax rates that are among the highest in the world…Obama wants U.S.-based multinationals to pay taxes on their operations abroad as if those operations were in the U.S. The bottom line is taxes to two countries — heftier taxes, despite whatever credits might be applicable… to impose such double taxation on the offshore operations of U.S.-based multinationals, the consequences could be devastating. U.S.-based business could be wiped out around the world because of the difficulty of competing with offshore-based rivals that have to pay taxes only to the (probably lower-tax) country where they have operations…A Tax Attack on America’s Top Companies, Jim Powell, National Review, 4/6/2009

Perhaps the President, who has never worked in a private business, imagines that the trade balance will improve if fewer American multinationals are doing business in, say, China. Boeing Aircraft, for instance, has moved many sub-assembly plants from the U.S. to China. Avoiding taxes? Trying to lower labor costs? No, Mr. President, that’s the arrangement required by the Chinese in exchange for China's agreement to buy Boeing Aircraft. Beijing would have gone with Airbus instead if Boeing had refused. Boeing workers, engineers, designers and managers in Spokane and Chicago are the direct benefactors, because tens of billions of sales are made in exchange for partial assembly of aircraft being done in China. It’s called accommodating a market. It’s a process that provides, in the case of Boeing, or Motorola, McDonald’s, or a thousand other firms, immense benefits to Americans who work for those companies here, to the local labor working for those companies, as well as an offset to the enormous negative balance of payments currently borne by the United States.

This is called doing business: mutual benefits for producers and consumers. Forcing Boeing to pay U.S. corporate tax rates on its Chinese subsidiary income is counterproductive, endangering the relationship. Do you want to be held responsible in Spokane and Chicago for the loss of tens of billions of Boeing sales to the Chinese, Mr. President? You can substitute your own company name from the list provided by Jim Powell in National Review. We don’t need our balance of payments to dip even further into the red, do we?


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