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Kerry targets outsourcing with tax overhaul Original Source Link: (May no longer be active)
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Kerry targets job outsourcing with corporate tax overhaul
By Bob Davis & John Harwood
The Wall Street Journal
WASHINGTON-Looking to capitalize on growing discontent over job losses and outsourcing, Democratic presidential challenger John Kerry is proposing a broad restructuring of the corporate tax code to prod multinational companies to invest more in the U.S.
The Massachusetts senator’s proposal, to be unveiled in a speech today in Detroit, would largely eliminate a tax break that lets U.S. companies defer tax payments on income earned abroad-sometimes for a decade or more. The break costs the U.S. Treasury about $12 billion annually. Mr. Kerry would then use the additional revenue to reduce the overall U.S. corporate tax rate to 33.25% from the current 35%.
The stick-and-carrot approach would encourage companies to shift more of their investments to the U.S., Mr. Kerry’s aides said. At the same time, the Democratic challenger would offer U.S. companies a one-year tax break to repatriate earnings now held overseas, a pot of money that the Congressional Research Service estimates at around $600 billion. During that year, repatriated earnings would be taxed at a 10% rate. Congressional Republicans have proposed similar tax holidays. Kerry aides didn’t have an estimate of the amount of revenue they expect would be produced by that gambit. But Mr. Kerry is counting on the money to pay for a two-year, $22 billion employer tax credit for new hires.
Mr. Kerry’s proposal, besides feeding the growing election-year debate about outsourcing, is bound to spark a debate about whether ending tax breaks for some of America’s largest corporations would strengthen or weaken the U.S. economy-even if overall tax rates are reduced. "When is the last time that you heard a Democrat propose a reduction in the corporate tax rate?" said Roger Altman, a Kerry economic adviser who was deputy Treasury secretary in the Clinton administration. "We’re trying to help this country get its fighting edge back."
But former Bush White House chief economist Glenn Hubbard said the Kerry plan would weaken U.S. multinationals and cause them to hire fewer staff for headquarters and research and development in the U.S. "It’s nutty," he says, though he did back the idea of cutting the U.S. corporate tax rate. Among the clear winners of the proposal would be companies that do nearly all their business in the U.S. But multinationals would have to make a more complicated assessment, weighing the loss of the foreign tax subsidy versus the benefit of a lower U.S. tax rate.
Mr. Kerry’s tax proposal is the first in a series he plans to make on economic issues as he attempts to shift the campaign debate toward his strongest issue: the loss of more than two million jobs during Mr. Bush’s presidency. Even as the overall economy continues to recover from recession-government statisticians yesterday affirmed earlier estimates of 4.1% growth in the fourth quarter of 2003-polls show that anxiety over lack of job growth, along with job losses from outsourcing and other factors, has shot to the top of voter concerns. Mr. Kerry claims his plans would produce 10 million jobs in four years, reducing the unemployment rate to 4.1% in 2009.
While the President has slashed individual income tax rates, he hasn’t sought reductions in the corporate tax rate, though he has advocated and won approval of corporate tax breaks to spur investment in equipment. Mr. Kerry’s advisers wouldn’t make any prediction about whether his plan would reduce the flow of jobs outsourced from the U.S., partly because they didn’t want the proposal to be portrayed as a protectionist effort to clamp down on trade in services. Indeed, tax rates are only one factor that companies consider when making investment decisions. Wage rates, productivity levels and the hassles of doing business long distance can turn out to be far more important.
Though there is no definitive count of the number of U.S. jobs lost through outsourcing, most estimates peg the number at between 250,000 and 500,000. While reforming the tax code has proved to be a lackluster political issue in recent years, Mr. Kerry’s advisers believe the furor over outsourcing makes eliminating overseas tax breaks an initiative voters will readily embrace. By coupling the proposal with corporate-tax-rate cuts and employment-tax credits, moreover, they say they complicate attempts by President Bush to portray Mr. Kerry as an antibusiness liberal. Mr. Bush’s camp is likely to attack the proposal as another tax increase, targeting the Democratic Party’s traditional vulnerability on that issue. Just yesterday, in advance of Mr. Kerry’s scheduled address in Michigan, the Bush-Cheney campaign launched new attack ads slamming his "troubling" propensity for backing tax increases.
But the 2004 Democratic candidate boasts two advantages on the tax issue that his predecessors lacked. The shift from budget surpluses to deficits has left voters nonplussed over Mr. Bush’s tax record. In a Wall Street Journal/NBC News poll earlier this month, 55% of Americans said Mr. Bush’s tax cuts have been too large. The second is the combustible combination of voter discontent over corporate misdeeds and joblessness, which is why Mr. Kerry’s aides argue that Mr. Bush is ill-positioned to defend tax breaks for corporations with overseas operations.
Unlike many other wealthy nations, the U.S. taxes all income a U.S. company earns, no matter the location. But U.S. multinationals can defer their tax payments by setting up foreign subsidiaries. Taxes are due when the foreign subsidiaries transfer the income to the U.S. parent. By deferring their tax bill, companies essentially get tax-free loans.
Mr. Hubbard, the former Bush administration economist, said the current system "advances the national interest" by strengthening U.S. multinationals competing with foreign corporations.
Mr. Kerry’s advisers said that they aren’t trying to punish multinationals that set up production facilities to serve foreign markets-for instance, a U.S. computer maker building a factory in Ireland to serve the European market. For those investments, Mr. Kerry would retain the current system of tax deferrals. But for other kinds of overseas investments-a U.S. computer maker setting up a call center in India to field U.S. service calls, for instance-deferrals would be ended. Overall, more than 75% of deferrals would be eliminated, a Kerry aide said.
"An American company shouldn’t have an affirmative tax incentive to move jobs overseas," said Gene Sperling, a Kerry economic adviser and former Clinton White House aide. Enforcement, though, would be crucial; otherwise corporations could find loopholes so they could improperly claim deferrals. Gary Hufbauer, an analyst at the Institute for International Economics, said the Kerry proposal would encourage U.S. companies to relocate their headquarters abroad as well to take advantage of tax breaks offered by foreign governments.
Parts of the Kerry plan harken to the economic prescriptions of previous Democratic administrations. In 1961, for instance, President Kennedy proposed to eliminate the deferral of foreign income as a way to quell a political furor over tax havens. But lawmakers weakened the proposal after large U.S. corporations argued that their competitive position overseas would be weakened. What emerged was an ungainly compromise, which still exists, under which income earned in tax havens isn’t eligible for deferral. But those rules have become so complicated and so poorly enforced that tax havens have grown anyway.
A variation of the other major part of the Kerry proposal, the new jobs tax credit, was last tried during the Carter administration. Some academic studies say that program helped boost employment. But they couldn’t say definitively whether employers added jobs because of the tax break or simply claimed the tax credit for hiring they would have done anyway. Under the Kerry plan, employers that added jobs would get a tax credit to cover the payroll taxes for the new employees. The credit is available for manufacturers, "industries affected by outsourcing," and small business that employ fewer than 100 people.
John Castellani, president of the Business Roundtable, an association of the nation’s largest business, said that job credits haven’t been shown to produce jobs. "It’s a little backwards," he said, arguing that what’s needed is a pick up in overall demand.
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