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Ending tax deferral of overseas income slaps U.S. firms with huge tax hike during recession

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Thomas J. Donohue
July 25, 2009
— President Obama’s recent proposal to increase taxes on foreign earnings of U.S. corporations ironically would jeopardize his own plans to revitalize our slumping economy and put struggling Americans back to work.

A major component of this plan is a $52 billion tax hike on these companies, in effect, limiting their ability temporarily to defer tax on foreign income.


Congress, which thus has far granted Obama most of his wishes, would be wise to say „no“ on this one.


While taxing „companies that ship jobs overseas“ was a sure-fire winner for the president when he spoke to heavily union audiences on the campaign trail, it would cause him untold economic grief with unemployment approaching 10 percent — destroying American jobs, raising consumer prices dramatically, and hampering efforts by U.S. companies to keep pace in a fiercely competitive global marketplace.


Today, virtually all foreign corporations are taxed under a territorial system. They are taxed on the money they earn in their home countries and taxed abroad on the money they earn in foreign countries. Unlike American companies, they are not taxed again when they bring their foreign income home.


To help American companies forced to compete with foreign companies that are not subject to such double taxation, Congress enacted a deferral provision.


Simply put, deferral allows American companies to delay paying the extra layer of tax on foreign income until it is brought home. Taxes on foreign income are still fully paid, but American companies get more flexibility with overseas cash flow, making them more competitive.


Deferral is a complicated concept that is easy to misrepresent. As a result, a number of mistruths and misunderstandings surround it.


The most popular misconception is that deferral encourages American corporations to ship jobs overseas. The reality is much different — global American corporations employed a total of 31.2 million employees in 2006 — with nearly 70 percent of them employed in the United States. For each employee overseas, a worldwide American corporation employs 2.28 employees here.


Worldwide American corporations also spur job creation in other parts of our economy. For example, a whopping $187.8 billion in research-and-development conducted by these companies is performed in the United States.


Further, worldwide American corporations purchase goods and services from U.S. suppliers and use U.S. companies in their distribution chains. The foreign operations of these companies stimulate domestic production, creating jobs for American workers.


Another half-truth is that deferral creates a tax advantage for investing and reinvesting overseas. Without deferral, however, American companies would face double taxation and wouldn’t have a fighting chance of competing against foreign companies. This would translate into higher consumer prices and fewer American jobs. Moreover, as businesses struggle to stay afloat in a recession, raising taxes is not a good idea A final myth is that worldwide American corporations invest abroad to reduce the cost of providing goods to U.S. consumers.


Actually, 90 percent of sales by the foreign operations of U.S. companies are to consumers in foreign markets. The truth is that American companies invest overseas to serve foreign markets — where 95 of the world’s population resides-provide goods locally, and reduce transportation costs.


We already know what happens when you repeal deferral — in 1986 Congress eliminated deferral for U.S.-flagged ocean carriers. U.S. shippers quickly saw a dramatic erosion of their market share, as many became acquisition targets for foreign-owned carriers. U.S. shippers moved their operations abroad, including jobs and capital investment.


If we want to make American companies less competitive in worldwide markets, drive up consumer prices, and cause domestic job loss, then limiting deferral is the way to go. But if we want to keep American companies competitive and spur economic growth, limiting deferral is not the answer. As it seeks a path back to prosperity, Congress shouldn’t look at deferral as a dirty word.



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