The President threatened to take away the tax deductions of companies that move jobs and profits overseas in his State of the Union address last night. “It is time to stop rewarding businesses that ship job overseas,” he thundered.
But the truth is that not even Mitt Romney’s tax accountant could get him a tax write off for moving jobs to Bangalore. So what in the name of Warren Buffet’s secretary could Obama possibly mean?
After doing some poking around, this is the best I can come up with:
American companies operate at a significant tax disadvantage compared to their international peers for two reasons: One, they pay about a 40 percent corporate tax rate, the second highest in the world after Japan which is due to slash its rate this April.
Two: America is among the few countries that follow the so-called worldwide system of taxation that puts American companies on the hook to pay taxes twice on their overseas income— once in the country where it was generated and then in America.
The Center for Fiscal Accountability notes that although the worldwide approach was once popular, about two-thirds of Organization for Economic Co-operation and Development countries, joined recently even by Japan and United Kingdom, now use the single-taxation territorial system. Under this system, companies are required only to pay local taxes, not their home country’s taxes.
This means that right now the United States is the only country that subjects its companies to both a worldwide system of taxation and a corporate tax rate above 30 percent. To mitigate this double jeopardy somewhat, the ever-merciful Uncle Sam currently allows American companies to postpone paying taxes on their overseas income until they repatriate it to the United States instead of when they earn it, notes Curtis S. Dubay, a senior analyst at Heritage Foundation. This tax deferral is what President Obama calls a tax break. And he’s been trying to end it for a while now, including in the budget he submitted to Congress last year, Dubay points out.
In other words, President Obama’s plan to insource jobs back to America is to make American companies as globally uncompetitive as he possibly can.
It takes hard work to be this daft, but somehow the president manages quite well, thank you very much.