Politics

On the Foreign Tax "Loophole"

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Washington Post econ columnist Robert J. Samuelson goes after some commonly held Obamaesque myths about taxing U.S. multinationals' overseas operations:

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly—less so than their foreign counterparts.

The price you pay for the chicken in China

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States), and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

Whole thing here.