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On Tue, 9 Jun 2009 10:12:13 -0700 (PDT), "Jan...@aol.com" <...@aol.com
http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aaaBdVMkjPnU
Bloomberg Commentary by Kevin Hassett
June 8 (Bloomberg) -- I’ve finally figured out the Obama economic
strategy. President Barack Obama and his team have been having so much
fun wielding dictatorial power while rescuing “failed” firms, that
they have developed a scheme to gain the same power over every
business. The plan is to enact policies that are so anticompetitive
that every firm needs a bailout.
Once that happens, their new pay czar Kenneth Feinberg can set the
wage for everybody and Rahm Emanuel can stack the boards of all of our
companies with his political cronies.
I know, it sounds like an exaggeration. But look at it this way. If
there were a power ranking of U.S. companies, like the ones compiled
by football writers for National Football League teams, Microsoft
would surely be first or second to Google. But last week, Microsoft
Chief Executive Officer Steve Ballmer came to Washington to announce
what Microsoft would do if Obama’s multinational tax policy is
enacted.
“It makes U.S. jobs more expensive,” Ballmer said, “We’re better off
taking lots of people and moving them out of the U.S.” If Microsoft,
perhaps our most competitive company, has to abandon the U.S. in order
to continue to thrive, who exactly is going to stay?
At issue is Obama’s policy to end the deferral of multinational
taxation.
The U.S. now has about the highest combined corporate tax rate, second
only to Japan among industrialized countries. That rate is so high
that U.S. firms have an enormous disadvantage versus competitors. The
average corporate tax rate for the major developed countries in the
Organization for Economic Cooperation and Development in 2008 was
about 27 percent, more than 10 percentage points lower than the U.S.
rate.
Tax Burden
U.S. firms have nonetheless prospered because our tax code allows a
business to set up a subsidiary in a low-tax country. When that
subsidiary earns profits, they are taxed at the rate of that country,
and don’t face U.S. tax until the money is mailed home.
The economically illiterate partisan Democratic view is that this
practice is unpatriotic and bleeds jobs from the U.S. The economic
reality is that American companies use this approach to acquire market
share overseas. The alternative is losing the business to foreign
competitors.
Don’t just take my word for it. A recent paper by Harvard economists
Mihir Desai and C. Fritz Foley and Berkeley economist James Hines and
published in the distinguished American Economic Review, gathered data
on American multinationals to explore the impact of foreign
investments on domestic U.S. activity.
Encourage Overseas Sales
Their conclusion was striking. The authors found that “10 percent
greater foreign capital investment is associated with 2.2 percent
greater domestic investment, and that 10 percent greater foreign
employee compensation is associated with 4 percent greater domestic
employee compensation. Changes in foreign and domestic sales, assets,
and numbers of employees are likewise positively associated; the
evidence also indicates that greater foreign investment is associated
with additional domestic exports and R&D spending.”
So when firms expand their operations abroad, taking advantage of the
lower foreign tax rates, it helps their workers in the U.S. Higher
sales abroad (surprise, surprise) are good for domestic workers.
It is worth noting that this study, which is confirmed by a boatload
of evidence elsewhere, was coauthored by the same James Hines who
recently wrote a sweeping review of international tax policy with
Obama’s top economist, Larry Summers. Summers has to know what the
literature says.
Inexplicable Stance
So the question is, why does Obama advocate a policy that so flies in
the face of everything that economists have learned? How could Obama
possibly say, as he did last month, that he wants “to see our
companies remain the most competitive in the world. But the way to
make sure that happens is not to reward our companies for moving jobs
off our shores or transferring profits to overseas tax havens?”
Further, how could Treasury Secretary Tim Geithner call a practice
that top scholarship has shown increases wages and employment in the
U.S. “indefensible?”
I have to admit I am at a loss. Maybe it is good politics to bash
American corporations, and Obama isn’t really serious about making
this change happen. But if the change is enacted, and domestic
corporate taxes aren’t reduced to offset the big tax hike, the result
will be a flight from the U.S. that rivals in scale the greatest avian
arctic migrations.
If that occurs, the firms that stay in the U.S. will be at such a huge
tax disadvantage that they will absolutely need a “rescue.”
(Kevin Hassett, director of economic-policy studies at the American
Enterprise Institute, is a Bloomberg News columnist. He was an adviser
to Republican Senator John McCain of Arizona in the 2008 presidential
election. The opinions expressed are his own.)
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Jan Eric Orme
"Isn't that stimulating?"
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