The Dark Side of Multinational Companies: Obama's Plan to Plug Tax Loopholes May Not Bring the Gains He Claims

Strategic Insights -

The Obama administration's proposal to tax multinationals on their overseas profits has been widely criticized for its simplistic approach to a complex issue. The plan aims to raise $210 billion in tax revenues over the next decade by plugging "loopholes" that allow companies to avoid paying taxes on foreign earnings. However, experts argue that this plan may do more harm than good, as it could lead to a loss of jobs and economic competitiveness.

Key Takeaways:

  • Most countries do not tax the foreign profits of their multinational firms at all, unlike the United States, which taxes profits that are repatriated at the 35% corporate tax rate.
  • When U.S. multinationals invest abroad, they often serve local markets and create jobs for management, research and development, and the export of components, with only 10% of their foreign output being exported back to the U.S.
  • One study estimates that for every 10% increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4%.
  • The estimated $210 billion revenue gain over 10 years represents only six-tenths of 1% of the decade's tax revenues of $32 trillion, and the Obama administration's endless deficits over the decade will total a gut-wrenching $9.3 trillion.
  • Obama's plan may lead to a loss of jobs as multinational firms may be forced to sell their foreign operations to tax-advantaged foreign firms or reduce investments in the U.S.
  • The U.S. has one of the highest corporate tax rates among wealthy nations, but the effective tax rate is reduced by preferences that also make the system complex and expensive.
  • Experts suggest that Obama would have been better advised to cut the top rate by ending many preferences, which could lower compliance costs and involve fewer distortions.

Statistics:

  • $210 billion: estimated revenue gain over 10 years from plugging "loopholes" that allow companies to avoid paying taxes on foreign earnings.
  • 35%: U.S. corporate tax rate on profits that are repatriated.
  • 27.5%: Korean corporate tax rate on profits.
  • 39%: U.S. top corporate tax rate, including state taxes, which exceeds the tax rate in most other developed nations.
  • $32 trillion: tax revenues over the next decade.
  • $9.3 trillion: Obama administration's deficits over the decade.
  • 10%: percentage of foreign output that is exported back to the U.S.
  • 90%: percentage of American multinationals' R&D that occurs in the U.S.

Sources:

  • Robert J. Samuelson, "The Dark Side of Multinational Companies", The Washington Post, 2009.
  • Gary Hufbauer, Peterson Institute for International Economics.
  • One study cited in the article, no specific date or title provided.