Washington Post: Good Slogan, But Outsourcing Bill Flawed

By September 30, 2010Economy, General, Taxation, Trade

The Washington Post continues its skein of well-reasoned editorials on the economy and federal legislation today with “Outsourcing Under Attack: ‘Keeping jobs in America’: As campaign slogan, great. As tax law, not so much.

The editorial addresses the Senate’s bipartisan vote to block S. 3816, the Creating American Jobs and Ending Offshoring Act, which would permanently raise taxes on U.S. businesses with foreign operations to fund  temporary tax relief for some other businesses. The Post notes the obvious politics behind the bill while rebutting it on the substance:

The Senate proposal would have been extremely difficult to administer: How, exactly, would the government connect particular expenses to the export of particular jobs, or identify the revenue attributable to particular goods or services transferred? But more fundamentally, the Senate proposal, like the White House plan before it, reflects basic misconceptions about the conduct of multinational companies. In brief, there are many cases in which opening, or expanding, a subsidiary overseas can create or sustain employment in the United States. Sometimes U.S. firms make parts abroad that they ship to the United States for assembly. If Congress starts taxing the income they make by doing so, some companies will respond by shipping the assembly overseas as well. A 2008 study by economists Mihir Desai, C. Fritz Foley, and James Hines of Harvard Business School found that domestic investment by U.S. firms grows by 2.6 percent for each 10 percent increment in the companies’ investment overseas.

In other words, counterintuitive as it may seem, international capital flows are not a zero-sum game for American workers. To set tax policy as if the contrary were true is to invite retaliatory measures by other countries on behalf of their “national champions.” There is a strong case to be made for reforming U.S. corporate taxation, which may disadvantage U.S.-based businesses as compared with those operating in Europe and elsewhere abroad. The code is full of irrational loopholes and perverse incentives. But dealing with them piecemeal — much less dealing with them on the basis of politically popular misconceptions — will only make matters worse.

That’s an important point: The U.S. tax system is flawed, of course, starting with having the second highest corporate tax rate among developed countries. If Congress wants to seriously address the U.S. tax system, its incentives perverse and otherwise, please!

As the “Key Vote” letter from the National Association of Manufacturers opposing S. 3816 observed: “[NAM] supports a national tax climate that does not place U.S. manufacturers at a competitive disadvantage in the global marketplace.”

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