Remember the rhetoric from Obama and Hillary during the campaign ,repeated wednesday during Obama's speech in Cleveland to great roars of enthusiasm? We have heard it many times.Basically the theme goes ; we are going to close the tax loopholes and tax breaks for big American companies that ship American jobs to other countries. This will bring those jobs back to Cleveland or any other city he is speaking in.It will put American workers to work and keep those jobs here in America where they belong. Often these "rewards " to American companies to ship jobs offshore are associated with ' the failed policies of the past "which of course means he wants the voter to believe that the right is behind this evil plot to give rewards to any company that hires people offshore.Kind of gets you upset to learn about this terrible plot.Right?
Do you really know what Obama is talking about? He is in fact talking about the US corporate income tax code.No doubt, knowing this, many may assume that this "loophole" was part of the Bush tax breaks for the rich.Actually many do not understand that the personal tax codes and corporate tax codes are two different sets of tax law with different rates,rules and deductions. The corporate tax loophole or incentive Obama is referring to is the part of the law that exempts from US income tax the profits that American companies make from offshore activities but only if those profits are kept outside of the United States.Now this is the important part to understand. This tax code has been in existence for FIFTY years.It is not a new goody for big business put in place by Bush. It has been in place and unchanged by the administrations of the past 50 years.
Lets put this in easy to understand terms. One day I was in a souk in Morocco where you could buy anything from daggers to donkeys and was amazed to see a few boxes of Tide detergent. One can find American products in the most unlikely places. Tide is made by P&G who's home office is in Cincinnati.Lets assume that a box of tide ,made in cincinnati can be sold at a profit of one dollar.If that profit is made here in the US ,P&G will pay corporate income tax of 0.35.After tax profit is 0.65 per box.P&G then learns that there is a large market in europe for tide and starts to export a lot of tide to its distribution center in Ireland and finds that the volume is so high that it makes sense to build a plant in Ireland .So P&G now has a plant in Ireland selling lots of tide and for this example we assume that the per box profit is still one dollar per box. {more on this later].This profit is now subject to corporate income tax in Ireland but Ireland has a corporate income tax rate of 12.5%.So P%G now has an after tax profit of 87.5 cents per box versus the 0.65 cents profit if that tide was made in the US. P&G can not bring that profit back into the US, say to build a new tide plant here unless it pays the US a 35% tax on that profit.So to get that money to work in our country P&G now ends up with about 0.57 left from the original one dollar profit.
If P&G keeps the profit off shore it does not pay the US tax and this is the loophole or tax break Obama is referring to. To close that loophole he has to get a law passed that would tax those boxes of tide made in Ireland and that will never happen because it would cripple US multi national companies , make them uncompetitive and ,now get this, cost high paying jobs here in the US.Yes the tide plant in Ireland would no doubt hire locals for most of the work.But all the marketing ,research,accounting,sales management ,and other functions would be in Cincinnati. Also no doubt there would be people from the US sent to Ireland to be managers of production etc. Many may think that these would be counted as exported jobs but just not true because these high paid US citizens working at the tide plant in Ireland are still subject to US income tax.Yes US citizens working abroad,except military, must pay US income tax.
Getting back to the profit on a box of tide made in Ireland would probably be more than the dollar per box in the example. There are little labor issues in Ireland,there is less government regulation,no unions and a better educated labor force. All of these factors would lead to lower costs.
Now think about this.What should a US company do with the profits that it has earned and kept offshore to avoid US taxes? Well if they are sitting on a pile of cash and the need arises for a new research facility or production facility do you think they will spend that money here in our country? Of course not. This is an example how our corporate income tax policy helps keep jobs offshore.It is not tax loopholes that send jobs offshore, it is the US corporate tax code with the second highest tax rate in the world,that pushes those jobs away.It seems like the other industrialized nations have figured out that it is in there best economic interests to have much lower corporate tax rates. Many have no tax on corporate profits earned off shore.
AS long ago as 1961 JFK asked congress to change the code to reduce the punishing tax rates on multinational and allow them to bring their profits home and it just did not happen.In 2004 our government did an experiment .The IRS offered multinationals a deal. They had a window of opportunity to bring their profits home for a one time deal of 5.25% instead of 35% tax rate .It was a good deal for everyone. The taxes paid on those repatriated profits generated 354 billion in tax revenues.
Why do we bight the hand that feeds us?That is what our corporate tax code does.The multinationals are not the enemy and our tax code makes them fight their competitors,from other countries,with one hand tied behind their back which further reduces their ability to create corporate support jobs here.
A much more reasonable approach that will help American companies and American workers is to quit attacking these companies ,reduce their tax rates to allow them to compete in the global economy,reduce their taxes on profits earned from goods exported from the US,and allow them to bring their offshore profits home to work here at a lower rate,this way the American worker wins,the multi national wins,and the IRS wins.
The next time you hear that we give tax rewards to companies that ship jobs off shore do not believe it.When you hear that we will close those loopholes its a lie.If the IRS goes after this "loophole"and tries to tax offshore profits that are kept offshore it will devastate our multinationals and I doubt that it is legally even enforceable. Our tax laws force our companies to ship jobs away and inhibit job growth here in our country.It is just not right , fair or good for the American economy.
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