The Wrong Approach to Multinational Taxation

Posted by: Michael Mandel on May 06

Obama wants to raise taxes on U.S.-based multinationals. I think that if he wants to create jobs, he’s making a big mistake. Take a look here.

….to the degree that the new proposals bite, U.S.-based multinationals will find themselves at a bigger tax disadvantage compared with multinationals based outside the U.S. that operate under a different set of tax rules. In essence, the Obama proposal is a tax increase on companies headquartered in the U.S. The end result could well be fewer good jobs in the U.S.

Here’s a radical idea: Obama should go the other direction, striking a blow for simplicity and jobs by reducing the corporate income tax rate from its current 35% to 25%. This is a move that has been advocated by many economists and politicians, notably Senator John McCain (R-Ariz.) last year in his Presidential campaign. But just as only a staunch Republican such as Richard M. Nixon could have opened up relations with China, a reduction in the corporate income tax may be a maneuver that can be accomplished only by a Democrat.

In exchange for the tax break, he should get corporations to make public a summary of their tax returns. Openness and transparency is essential.

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Reader Comments

Kartik

May 6, 2009 11:36 AM

Michael is assuming that Obama actually wants to create private sector jobs and competitive corporations.

No.

Obama wants to subjugate the private sector and expand the public sector, so that more than 50% of the US population is dependent on the government is some way.

The relationship between citizen and government will be like that between an addict and drug dealer.

Thus, Obama's actions are consistent with his true goals.

CompEng

May 6, 2009 12:16 PM

The US gets its income primarily from income taxes. I've been told most other governments rely more on VAT taxes which are rebated on exports from those countries. This means that the US taxes production and other countries tax consumption. This necessarily encourages a negative trade balance for the US, which US-based multi-nationals take part in.

Taxing the overseas subsidiaries of corporations headquartered in the US will discourage companies that want to remain American from sending jobs overseas (but will reduce overall profit, competitiveness, and therefore overall jobs created by the corporations). The net effect may be to drive companies from being headquartered in the US to other countries unless combined with a corporate tax reduction (which I wouldn't be surprised to see a little further down the line from Obama).

The other alternative would be to start moving from income taxes to sales taxes in the US: taxing consumption instead of production. I don't know enough to know how viable that is, but I suspect the biggest obstacle is political: the perceived regressive nature of sales taxes. But if we don't do it, we may well find ourselves continually lowering corporate income taxes or remaining non-competitive in production.

CompEng

May 6, 2009 12:26 PM

Kartik,
Why assume the worst of people?

Kaleberg

May 6, 2009 11:24 PM

Companies are always whining about taxes. History shows that such complaints are best ignored. In fact, the high tax rates of the 50s, 60s and even 70s led to lots of job creation and economic growth. If you look at the facts rather than listening to the whining, business does better in anti-business climates rather than pro-business climates. It's a simple fact.

CompEng

May 7, 2009 08:43 AM

Kaleburg,
In the 50s, 60s, and most of the 70s, globalization was less of a factor. So if tax rates were high, they were at least relatively evenly applied, and thus less of a competitive differentiator than today.

Kartik

May 7, 2009 10:51 AM

CompEng squealed : "Why assume the worst of people?"

er...because Obama's actions clearly indicate this intention?

jj

May 7, 2009 11:42 AM

Drop corporate tax rates?
Not that tired issue again.
fewer good jobs? ARE YOU KIDDING?
Multi-nationals have failed to provide good jobs. They constantly shut down and open in other countries turning good jobs into bad jobs, pollute where they please, and pay off officials to keep labor from organizing.
Only small businesses create GOOD JOBS.
Mainly sole-proprietor and LLC companies.
And another thing, if as you say, they will move to another country, will they take the executives with them?
Hope they like their new home, cause they WILL tax em hard.
Multi-nationals will turn this world back into kingdoms and peasant fields.

CompEng

May 7, 2009 12:58 PM

Kartik,
Raising taxes or committing to bigger government is consistent with "trying to subjugate the private sector". But then, admiring a neighbor's new Sports Car is also consistent with attempting to steal it, yet there are many many people who do the first and not the second. There are simpler and more plausible explanations.

I've had managers whose planning process is to figure out what they think they want, commit to it, and then work out the details later. This can lead to committing to things they can't possibly afford. I think Obama has this failing, common to liberals and government planners: he wants everyone to have everything and doesn't realize that's not possible. Liberal groups have complained that our tax structure drives investment overseas, and so Obama thinks this is something he can do that will fix that and earn political points as well as more tax dollars. He probably hasn't spent enough thought on the practical consequences: he's too busy trying to find a "middle ground" between his constituents.

Look, you don't have to harbor irrational notions about someone just because you don't like them.

Joe Cushing

May 9, 2009 11:57 AM

If I were running a Detroit based Multinational, Maybe I consider moving to Windsor but if my company was based in Chicago, the move overseas would be harder. At least with the Detroit/Windsor move, I could keep most of the same people. I guess what would happen is that overseas based multinationals will have a competitive advantage and eventually win a greater share of U.S. business. This means more upper management jobs would be overseas while the middle and lower level jobs would stay here. I wonder if a company could move itself in name only. Keep corporate staff in the U.S. but incorporate in another country. I think that would be the ideal response to this. If that option were available, that's what I would do. I would move my company to the most corporate friendly country and visit it's home office a few times a year. Maybe I'd move someplace warm like the Cayman Islands.

B. Turner JD/CPA

May 9, 2009 03:33 PM

Doesn't Obama have someone he can talk to before he embarrasses himself?

Francisco Aragon

May 9, 2009 07:43 PM

This is the BIGGEST lie in American Capitalism. Michael, pretty simple, as long as the companies get tax breaks AND they COMMIT to create jobs here and not in Bangalore, Costa Rica, Poland or Shanghai, I am for you on this but it has been proven over and over that the objective is to make MONEY and they will go to where they can make more....

Tom e.

May 9, 2009 07:56 PM

Multinationals want the US government to spend hundreds of billions to protect their global supply chains, but they do not want to pay for it with corporate income taxes.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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