The US Corporate Tax foreign profit repatriation rules are completely backwards:

A)      US corporations receive tax subsidies to manufacture overseas: mainly through rules that don’t tax overseas profits, unless the cash is repatriated.  Our 35% nominal corporate tax rate is among the world’s highest, so the benefits of deferral are dramatic.

B)        There is no charge for foreign producers to use our dynamic and voracious consumer markets –an expanding series of free trade agreements have made customs duties largely a thing of the past, and as a huge net importer, the US economy loses out in this equation.

The results of this counterintuitive tax structure are increasingly evident: 

  • US multi-nationals can compete, but only if they take advantage of subsidies and tax driven job and profit off-shoring strategies, to avoid high domestic taxes  – US effective corporate tax rates are closer to 20%, among the lowest in the world
  • US Multinationals employ legal tax strategies to keep profits abroad – GE perennially pays little or no US taxes,  companies like Exxon and Chevron pay no US taxes, while paying billions in taxes abroad, and our tech giants are not far behind.
  • There is increasingly a concern that In order to support profitable overseas operations, US developed intellectual property is being cheaply transferred to overseas subsidiaries

Scholarly papers as far back as the Kennedy administration have studies this predicament, but this tax structure was not as bad for an exporting powerhouse economy.  Once the balance of job growth and manufacturing was tipped in favor of foreign production (an acceleration of which occurred on the back of myriad recent free-trade agreements), the job destroying impact of this tax structure became much more acute – since 1990, manufacturing jobs in the US have been reduced by almost 30% or 6mm jobs, while service sector jobs have grown by 30% including primarily domestic sectors like Health Care and Education which have witnessed almost 70% job growth.  The recently published 2010 study by the President’s Advisory Panel on Federal Tax Reform, suggests that corporate tax distortions are impacting domestic capital allocation and job growth.

Why can’t we fix this vexing but seemingly obvious problem? Political extremism:

1)       Progressive extremists view any reduction in nominal corporate tax rates as unacceptable corporate welfare, and blithely look away, while politicians and think tanks who introduce legislation to reduce  effective rates by crafting ad hoc tax subsidies and incentives , further expand their power bases

2)       Right wing partisans view the retention of the current profit repatriation scheme as a top political agenda item – they don’t even ask for lower corporate rates that much anymore, because it is more efficient to legislate a tax holiday every few years to bring profits home

Corporate leaders are caught in the crosshairs of these extremists  – locating in the US is not tax effective, and locating overseas is killing their home market, because as Henry Ford understood, employees must have jobs which allow them to purchase the goods they produce.  Fiscally conservative centrists, interested in job growth, must educate themselves on this issue and help break the hold of extremists.  The solution is waiting:

  • Left-wingers must understand that a romantic/historical attachment to high nominal corporate tax rates, while allowing expanded loopholes, is killing US jobs – the one thing they profess to view as most sacred.
  • Right-wingers must realize that we have travelled through the looking glass on job off-shoring efficiency – well paying domestic job growth is essential to long term stability of the US economy so it’s time to end subsidies and support for job off-shoring.

Finally, everyone should ask themselves, if a company does not pay US taxes, or create US jobs, is it really a US corporation?  Should it have the right to lobby congress?  Should it be able to call the US embassy for help when its employees are imperiled? Should it benefit from tax subsidies?

US job growth has reached crisis status.  It is time for fiscally responsible centrists to work together to fix our corporate tax structure and save our most precious commodity – jobs and the American Dream!