Punishing Investment in the United States

By July 26, 2007Economy, Trade

Over at Treasury today, Secretary Henry Paulson is leading a daylong conference on the U.S. tax system and its role in global competitiveness. (Details here.) Starting point of discussions: The U.S. tax system too often discourages investment and represents a disadvantage in the global marketplace.

Meanwhile, over at the U.S. House, some Congressmen are working to make the United States even less attractive for business, in this case, foreign-based corporations. Rep. Lloyd Doggett is seeking to add a $7.5 billion “revenue raiser” to the farm bill reauthorization, H.R. 2419, by targeting a tax structure, “earnings stripping.” Here’s how CQ Today explains the arrangement:

A foreign-owned company doing business in the United States sets up a subsidiary in a third country. The subsidiary takes possession of an important asset, such as a trademark, a patent or intellectual property.

Then, the U.S. arm of the company makes interest or royalty payments to the other subsidiary. Under U.S. law, those payments are deductible, reducing or eliminating the company’s U.S. tax liability, shifting it to the third country. The maneuver essentially allows the company to pay taxes at rates lower than those in the United States or in its home country.

Ah, yes, CQ describes it as a “maneuver,” and advocates talk about “closing loopholes.” A better way of thinking about it: These provisions represent a policy decision to structure the tax system to encourage investment in the United States. Which is a good thing. More CQ:

This is “doing something that’s going to discourage these businesses from operating in the United States,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers. “I think any business is going to rethink their plans, if they’re going to be saddled with additional taxes.”

And from the Organization for International Investment, a news release (.pdf).

“This protectionist tax hike on companies bringing jobs into the United States comes completely out of left field,” said Todd M. Malan, President and CEO of the Organization for International Investment (OFII) a business association representing 160 of the largest U.S. subsidiaries of companies based abroad. “Global capital markets are worried enough about trade protectionism in Congress, a discriminatory tax aimed at “foreign companies” could spook an already jittery stock market.”

Whether the motivation is protectionism or mere hankering for billions more in tax dollars, the effect of still the same: Make the United States a less attractive place to business….create wealth…and hire employees.

Leave a Reply