The Senate is likely going to wrap up working in Washington this week before adjourning to head back to their home states and meet with constituents.
But, before Congress leaves town for over a month, they will be working to pass a continuing resolution -- basically, it's a stop-gap spending bill to keep the government running past Sept. 30, when current funding is set to expire. Republicans are hoping that a "clean" CR is passed, which would mean that government spending would continue at last year's levels instead of increasing for new pet projects and programs. While this certainly still spends more than most fiscal conservatives are comfortable with, it would still be a step in the right direction.
Also on the agenda this week: Democrats are pushing a bill that they say would protect America's jobs. Unfortunately, the bill would do anything but that. By changing the way American companies doing business overseas are taxed, it will very likely push more jobs out of the country as businesses scramble to remain competitive with foreign producers. An editorial in the
Wall Street Journal, titled "
The Send Jobs Overseas Act" explains why this bill is terrible on several levels:
Here's an excerpt:
At issue is how the government taxes American firms that make money overseas. Under current tax law, American companies pay the corporate tax rate in the host country where the subsidiary is located and then pay the difference between the U.S. rate (35%) and the foreign rate when they bring profits back to the U.S. This is called deferral—i.e., the U.S. tax is deferred until the money comes back to these shores.
Most countries do not tax the overseas profits of their domestic companies. Mr. Obama's plan would apply the U.S. corporate tax on overseas profits as soon as they are earned. This is intended to discourage firms from moving operations out of the U.S.
The real problem is a U.S. corporate tax rate that over the last 15 years has become a huge competitive disadvantage. The only major country with a higher statutory rate is Japan, and even its politicians are debating a reduction. A May 2010 study by University of Calgary economists Duanjie Chen and Jack Mintz for the Cato Institute using World Bank data finds that the effective combined U.S. federal and state tax rate on new capital investment, taking into account all credits and deductions, is 35%. The OECD average is 19.5% and the world average is 18%. (See the table nearby.)
We've made this case hundreds of times on this page, but perhaps Mr. Obama will listen to his own economic advisory panel. Paul Volcker led this handpicked White House tax reform panel whose recent report concluded that "The growing gap between the U.S. corporate tax rate and the corporate tax rates of most other countries generates incentives for U.S. corporations to shift their income and operations to foreign locations with lower corporate tax rates to avoid U.S. rates."
As nations around the world have cut their rates, the report warns, "these incentives [to leave the U.S.] have become stronger." Companies make investment decisions for a variety of reasons, including tax rates. But as long as the U.S. corporate tax is more than 50% higher than it is elsewhere, companies will invest in other countries all other things being equal. One Volcker recommendation is to lower the corporate rate to closer to the international average, which would "reduce the incentives of U.S. companies to shift profits to lower-tax jurisdictions abroad."
Mr. Obama believes that by increasing the U.S. tax on overseas profits, some companies may be less likely to invest abroad in the first place. In some cases that will be true. But the more frequent result will be that U.S. companies lose business to foreign rivals, U.S. firms are bought by tax-advantaged foreign companies, and some U.S. multinational firms move their headquarters overseas. They can move to Ireland (where the corporate tax rate is 12.5%) or Germany or Taiwan, or dozens of countries with less hostile tax climates.
Click here to read the full article.
