Baseball Crank
Covering the Front and Back Pages of the Newspaper
March 4, 2009
POLITICS/BUSINESS: Obama's Plan To Drive Corporations Out Of the U.S.

I know I link to a lot of pieces by my colleagues at RedState, but this from Skanderbeg (who knows his stuff because he does a lot of business abroad) is really a concise masterpiece explaining the lunacy of Obama's latest plan to jack up taxes on already-battered American businesses. A sample of his explanation of the existing anti-business rules that Obama wants to make worse:

Suppose you are CEO of XYZ Widgets, Inc., an international widget supplier based in the U.S. You have a competitor, ABC Widgets Oy, based in Finland. Both of you sell widgets in the U.S., earn profits, and pay U.S. corporate tax on those profits. Both of you sell widgets in Finland, earn profits, and pay Finnish corporate tax on those profits. So far, so good. However, here things diverge. ABC Widgets Oy can take its remaining after-tax profits from the U.S. and bring them back to home base in Finland to invest in things like increasing widget production - and not face another hit of Finnish corporate tax on that money. In contrast, if you (XYZ Widgets, Inc.) want to repatriate your after-tax profits from Finland back to the U.S. - to invest in things like increasing YOUR production of widgets...well, you have to pay the full (and also too-high) U.S. corporate tax of 35% on those already-taxed-in-Finland profits. You'd probably choose to leave that money outside the U.S. - and, oh, use if for something like investing in increasing your widget production by building a new plant in someplace like Romania.

In the above, replace "Finland" with the name of any other country in the world, and the story is the same. The U.S. is the only country that has this "double-taxation" rule.

There are three possibilities. One, Obama really is this economically ignorant. Two, Obama knows the consequences of his actions and genuinely desires to reduce the presence of large corporations in the U.S. and replace them with government employment. Three, Obama is cynically pandering to his economically ignorant base and, perhaps, hoping that somehow his plan will end up getting scuttled.

Posted by Baseball Crank at 12:06 AM | Business • | Politics 2009 | Comments (17) | TrackBack (0)
Comments

I'm no friend of Obama or the tax system, but the linked post is seriously misleading. Yes, the US taxes global income. But the article fails to mention that the US gives a foreign tax credit!

So, yes, you pay US taxes on the profits you earn in Finland when it is repatriated, even though you already paid Finnish taxes. But you get to credit the taxes paid to Finland against the taxes due to the IRS. For example, if you made $100 in Finland, and the Finnish tax rate is 20%, you would pay $20 to Finalnd. The US would also tax that $100 at 35%, but you would only pay $15 to the IRS ($100*35% - $20 foreign tax credit).

Posted by: A.S. at March 4, 2009 12:58 AM

We all knew BO was ignorant about foreign policy, so he hired the brilliant Joe Biden to cover the flaw. What most of us overlooked is that he is also intensely ignorant about economics, and hiring the brilliant Timothy Geithner now seems like a questionable method of filling that particular gap.

The ironic thing is how liberals love both progressive tax rates and taxing corporations. Yet the corporate tax is passed onto the general populace in the form of price increases, becoming a most un-progressive form of taxation in the process. It is, however, an excellent form of subsidy for inefficient (non-profit-making) businesses.

Posted by: Dai Alanye at March 4, 2009 1:35 AM

Something a bit more complete - http://www.reuters.com/article/ousiv/idUSTRE52153320090302

Seconded A.S's post - your guy may know some things, but not foreign tax credits. Here's the IRS - http://www.irs.gov/businesses/article/0,,id=183263,00.html

I'll go with option 4, say something bad about Obama because most people won't care about what you are saying, just that you are saying that.

If you've got an account with cross border experience around, ask them - because I'm fairly sure youre quote block is quite wrong. The designation between foreign corporation and foreign corporation owned by a US entity is quite important in tax purposes though.

Posted by: Dave at March 4, 2009 3:16 AM

*accountant

Posted by: Dave at March 4, 2009 3:17 AM

"The US would also tax that $100 at 35%, but you would only pay $15 to the IRS ($100*35% - $20 foreign tax credit)."

That sounds more accurate, from what I recall from internat'l tax class. I don't recall an instance of double-taxation on the same income.

I'll wait until I see the actual proposal from Obama.

Posted by: MVH at March 4, 2009 7:39 AM

Crank, you have become a parody of yourself.

Posted by: Sigher at March 4, 2009 10:57 AM

Hey Crank-have you seen the article from Politico laying out how the White House, Carville and Begalia have been stage managing this whole Rush Limbaugh attack plan since before the New Year? Gee, I seem to remember a few posters explaining to the lefties how this was all being manufactured. Of course, they were too busy following orders and attacking Rush to have it sink in.

Posted by: dch at March 4, 2009 11:49 AM

How is it a masterpiece when it so balantly ignores tax credits? This is not remotely a masterpiece.

It is humiliating to read this stuff and think people will actually believe what you read at redstate is truth.

It is posts like this that do nothing more than appeal to the most base fears of what Obama is going to do or is doing and in no way appeals to anyone but the most hardcore readers.

It is so disingenuous to see Republicans get religion on fiscal matters now that they are the minority party. (I consider myself a conservative, but not a Republican. At least until conservatism = Republican) Had the Republican president over the past 8 years not presided over the largest government expansion in history then the economy would not have crashed when it did. (It probably was still coming, but without question, it was accelerated by the obscene spending of the Republican admin.) Had it not been accelerated, no way Obama defeats Hilary in the primaries. What really pushed Obama through was the signs of an economic crash. Then in the general, Obama and McCain are actually running very close (though Obama was going to win) when the economy started to fall apart and that was the end of even a long shot for McCain. I also would say that had the past Republican president stuck to any conservative economic principles, most people would have been in better condition with their finances. Which leads me to believe that Romney would have won the Republican primary...and everything may have been very different.

As a conservative, I put the vast majority of blame for allowing us to get to an Obama administration squarely on the past Republican administration. By ignoring every one of their economic principles, they set this country up in a horrible, horrible way.

Posted by: CW at March 4, 2009 2:34 PM

OK, I checked and you guys have a fair point that the credit can prevent this from netting out as a literal double taxation. But the main point stands: it still means that a US company has to pay more in taxes to bring the money back onshore than a competitor incorporated in a different country (especially a jurisdiction like Estonia that has effectively no corporate taxes - there are more of those low-tax jurisdictions these days in the former Warsaw Pact states, which ironically understand economic competitiveness better than we do), and it still means that under Obama's plan, that competitive disadvantage will now be the same wherever a US company tries to reinvest its income unless it ceases to be a US company altogether. Why Obama thinks that's a good way to treat American companies in this economic climate ... your guess is as good as mine.

Posted by: Crank at March 4, 2009 4:03 PM

Damn the Facts!! Full Speed Ahead!!!

Posted by: Magrooder at March 4, 2009 4:39 PM

No Crank, the only point is you don't like Obama. Your original post was flat out misleading/wrong. Spin away. One day when you are flat out wrong will you retract it???

Posted by: javaman at March 4, 2009 4:42 PM

No Crank, the only point is you don't like Obama. Your original post was flat out misleading/wrong. Spin away. One day when you are flat out wrong will you retract it???

Posted by: javaman at March 4, 2009 4:42 PM

It appears that there is no double taxation in the literal sense: the U.S. corporation gets a credit for the tax paid overseas. So, yes, the quoted post was pretty misleading.

BUT, the fact remains, I think, that the U.S. would be the only industralized country to tax (at all) external profits that have already been taxed in the foreign country where the profit was earned. This would create quite a disadvantage.

Posted by: per14 at March 4, 2009 4:57 PM

"OK, I checked and you guys have a fair point that the credit can prevent this from netting out as a literal double taxation."

Just so were clear, the US tax rules, as A.S. described, are in effect NOW - and have been for some time. The tax credit is not Obama's new program, which remains to be seen. It may just make sure all companies are paying the US part of the tax

Posted by: MVH at March 5, 2009 7:58 AM

"But the main point stands: it still means that a US company has to pay more in taxes to bring the money back onshore than a competitor incorporated in a different country"

Well, that's true, but it's also true that it puts a US company who sites its production abroad on the same tax footing as US company who sites its production in the US. The purpose of the credit is tax neutrality, and to eliminate the incentive for a US company to move its production to another country.

I think the real problem you have is with the 35% tax rate - the tax credit is relatively innocuous.

Posted by: MVH at March 5, 2009 9:49 AM

"and it still means that under Obama's plan, that competitive disadvantage will now be the same wherever a US company tries to reinvest its income unless it ceases to be a US company altogether"

But I think the point is that Obama is proposing to tax amounts earned *and held* overseas. Yes, this will be a disincentive for US corporations, but only with respect to overseas operations.

It is somewhat protectionist, and hurts US multinational corporations to the extent they earned money and kept it overseas, but I don't think it hurts US residents much if at all (except with respect to the somewhat lowered earnings that shareholders of those corporations might get)...

Oh, and yes, the US corporate tax rate of 35% is a debacle.

Posted by: A.S. at March 5, 2009 10:29 AM

"But I think the point is that Obama is proposing to tax amounts earned *and held* overseas."

Ahhhh, ok - now I see what Obama is trying to do. Instead of waiting for the US companies to repatriate the assets to the US, he will tax them where they are held - presumably, in the year they are earned.

I wouldn't call that protectionist. It eliminates an incentive for US companies to not repatriate funds held abroad. It's defensible on tax neutrality grounds - US companies are now taxed on income earned here and abroad regardless of whether they repatriate it. This simply levels the playing field - a field that created an incentive for profits to remain outside the US. Now, if he was proposing a higher tax on income held or earned abroad - THAT would be protectionist.

As for the 35% corporate tax rate, I'm not per se against lowering it, so long as there is a corresponding cut in government spending. I don't buy the strong version of the Laffer curve theory that says the tax cut will pay for itself.

Posted by: MVH at March 5, 2009 10:58 AM
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