Der Spiegel, “Russia’s Factories Gear Up for Efficiency”

Take Chelyabinsk Forge-and-Press: It remains Russia’s only producer of the huge wheels used on the Ural truck. And for years after the collapse of the Soviet Union, the plant had few other customers. But in 2005, owner Valery Gartung, a former engineer at the factory and now a member of Parliament, put his 21-year-old son, Andrey, in charge. “Everybody was shocked,” says the junior Gartung, who holds a management degree from South Ural State University in Chelyabinsk but had little practical experience.

And…

On the shop floor today you wouldn’t know the world is suffering an economic crisis. Workers proudly show off metal links produced for Koch, a German manufacturer of conveyor belts. In April the factory signed up ZF, a German company that builds transmissions and other parts for the likes of BMW and Mercedes-Benz. The Russians will make transmission gears for trucks. “The most important thing is that we now make far, far more kinds of parts,” says Alexander Gorkushka, a section head in the forge.

Heritage Foundation: “Obama International Tax Plan Would Weaken Global Competitiveness”

From The Irish Echo Online, the U.S.-based publication of Irish news, “Obama tax move targets Ireland too”

May 6, 2009 Washington, D.C. — President Barack Obama placed Ireland straight in the crosshairs this week as he took aim at reforming corporate tax laws regulating overseas profits generated by U.S. companies.

And there were indications from Dublin that the Irish government was prepared to battle what is clearly more bad news for the country’s embattled economy by calling for help from sympathetic members of Congress.

“The economy has been dealt a serious blow with the U.S. government signaling it is to target €2.5 billion of Irish tax revenues in broad economic reforms,” the Cork-published Irish Examiner reported.

From The Irish Herald, “Obama to visit Ireland.” Good timing!

To be fair, the story is based solely Congressman Richard Neal (D-MA) saying, you bet he’ll come. And it is a safe bet. Rep. Neal had interesting things to say about the President’s news conference on taxation.

“Ireland should not have been on that list,” he said, before pointing out the significance of the fact President Obama did not mention Ireland at his press conference about tightening up tax rules. Asked whether Ireland could rely on him to lobby the US government, Congressman Neal was hesitant, but did indicate that he is not keen to see all of these companies being forced back into the States. “That’s a pretty heavy lift” he said. “The idea is to keep American companies competitive in a global economic environment.”

And, as noted below, the White House quickly retreated and retracted the targeting of Ireland (and Holland and Bermuda). Now if the President would do the same for U.S. corporations with international operations.

From the Royal Netherlands Embassy in Washington, “The Netherlands: attractive location for foreign investors, but not a low-tax country“:

On May 3rd, the White House presented a fact-sheet titled ‘Leveling the playing field’, which states among other things that The Netherlands is a ‘low-tax country’. That led to some misinterpretation.

Dutch Ambassador to the USA, Renée Jones-Bos, conveyed this message to the White House, the Treasury Department and the Department of State. The White House has adjusted the fact sheet accordingly.

Seems like a pretty fundamental mistake. All the news reports we’ve seen have been based on comments from Dutch government sources. Will the White House or Treasury comment?

Wall Street Journal editorial, “Obama’s Global Tax Raid“:

The explicit goal of this plan is to reduce the incentive for U.S. companies to invest abroad, which Mr. Obama derisively calls “shipping jobs overseas.” Foreign companies may relish the loss of U.S. corporate competitiveness that his proposal will bring in the short term. But in the long term, reducing U.S. investment globally will hurt everyone. And that investment is a two-way street…

Some of Mr. Obama’s advisers understand all this, but then their real goal isn’t tax reform or U.S. competitiveness. It’s a revenue grab, one made easier by the fact that overseas tax “avoidance” is easily demagogued. To that political end, Mr. Obama conflates tax deferral with the offshoring of jobs — hence the sly reference to Bangalore, India. With trillions of dollars of new spending, the White House and Treasury are desperate for new tax sources to pay for it all.

But even as a revenue raiser, this is likely to fail. Fewer companies will keep their headquarters in the U.S., especially small or mid-sized firms that can slip away without becoming a political target. Those companies that can’t flee will sooner or later demand relief from Congress, which will be happy to create even more loopholes.

The editorial also includes an informative discussion of U.S. investing in the Netherlands and the Dutch investing in the United States. Suffice it to say, the President’s proposal discourages both.

Earlier posts on the President’s tax proposals.

A statement from Senator Max Baucus (D-MT), chairman of the Senate Finance Committee:

“The President’s proposals highlight an important point – our corporate international tax system needs reforming. There are a number of Finance Committee ideas reflected here, such as the proposal to address offshore tax evasion and making the R&D credit permanent for businesses, but further study is needed to assess the impact of this plan on U.S. businesses,” said Baucus. “I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses. These policies must be designed to encourage economic growth and create good‐paying jobs Americans need right now. The proposals announced by the President today set the table for tax reform, and I look forward to sitting down with the Administration soon to take up these issues.” 

The Washington Post’s lead editorial is entitled, “Corporate Tax Reform,” with the secondary headline, “The president’s tax plan can be the start of an important discussion.”

OK. But you don’t start an important conversation by punching your potential talking partner in the stomach and calling him names. From the President’s remarks:

And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals.  It’s a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share.  It’s a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all.  And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.

The President’s presentation yesterday clearly sought to conflate two separate issues, the taxation of U.S. companies with a global presence (most prominently, the deferral issue), and the “tax haven” issue. He appeared on stage with the IRS Commissioner, Douglas Shulman, sending a clear, intended message that the problem he’s addressing is one of corporate scofflaws, that is, bad actors.

In October 2007, House Ways & Means Chairman Charles Rangel unveiled broad changes of the U.S. tax code and corporate taxation, a legislative proposal, the Tax Reduction and Reform Act. In his news release, he said:

This legislation will provide tax relief to more than 90 million working families and cut the corporate tax rate to help American companies stay competitive internationally. For too long, hardworking families have struggled to keep pace with the rising cost of living in America. This legislation would put money back in their pockets to combat the growing economic insecurity gripping our nation.

The NAM issued a statement reacting to Chairman Rangel’s proposal:

While the package includes some tax relief supported by the NAM, including corporate tax rate cuts, we are extremely concerned about the tax increases that will impact manufacturers of all sizes. Based on our initial review, for many manufacturers, the proposed tax increases could well exceed the benefits of the proposed tax relief.�
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Over the next few months the NAM will be taking a closer look at the tax package to fully assess how it would impact our members.  The Chairman has indicated that this is a long-term project and we look forward to working with congressional tax writers to develop a pro-growth, pro-competitiveness tax package that benefits all U.S. manufacturers and their workers.

Now, that’s how you start an important discussion. 

An especially keen and useful summary of President Obama’s tax proposals yesterday comes from Richard Rubin of CQ, “Battle Begins as Tax Plans Issued“:

Announcing $198.3 billion worth of revenue-raising tax changes during a recession is a tough political proposition. But as President Obama begins a bruising fight with big business over international taxes, his greatest advantage may be his ability to define the debate.

After two years of vague campaign-trail talk about ending “tax breaks that ship our jobs overseas,” Obama called Monday for legislation that would significantly change how U.S.-based multinational corporations are taxed — and he did it by coupling quick descriptions of technical tax provisions with stark language about scams, loopholes, evasion, hiding and rule-breaking.

Rubin also talked to the NAM’s Dorothy Coleman, vice president of tax and domestic economic policy.

Business groups, prepared for the attack, pointed to the need to serve overseas markets. They also cited the research and headquarters jobs that those foreign operations support here.

“It’s an integrated system that we have,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers. “U.S. jobs support jobs overseas, and to the extent that you impose a significant amount of new taxes on multinationals, they’re not going to be able to hire as many people.”

Related information

• NAM news release, “NAM Calls New Taxes on Corporate Foreign Earnings a ‘Disastrous Proposal‘
• PACE Coalition news release, Promote America’s Competitive Edge, “PACE Coalition Seeks to Preserve a Level Playing Field for U.S. Companies Competing Abroad.”
• March 24 letter to Congress signed by 200 trade associations and businesses, objecting to tax deferral proposals. 

Radio Netherlands, “Government astonished at ‘tax haven’ branding”

Register, “Obama declares war on Ireland over tech tax avoidance”

Intern, “IT-Unternehmen kritisieren US-Steuerpläne” (IT Firms Criticize U.S. Tax Plans)

Front page, Washington Post:

Targets…

Tax dodge…

Crack down…

Major offensive…

Companies that ship jobs overseas…

Moving jobs off our shores…

None of this invidious, populist rhetoric from the President and the Post has anything to do with the reality of taxation of overseas earnings.

For a more restrained, fair-minded analysis of the President’s proposal we turn to the New York Times’ editorial page, a reliably anti-corporate font of left-liberal opinion. From “Tax Salvos“:

The Obama proposals oversimplify the challenge, both technically and politically.

One of the most controversial proposals would delay deductions against overseas profits until those profits are brought back to the United States. In theory, that makes perfect sense, because matching deductions and income in the same year is a fundamental principle of United States tax law.

In practice, applying the matching principle to overseas operations could put American companies at a competitive disadvantage to foreign companies that do not face United States tax laws. It could even impede job creation in the United States — exactly the opposite of what the Obama administration intends. That’s because some of the expenses incurred in generating foreign profits are for support jobs in the United States, like human resources and accounting positions. If companies cannot write off those employment expenses in the year they are incurred, they may move the jobs overseas.

That’s the reality of it.

The National Association of Manufacturers just issued a news release with NAM President John Engler’s reactions to President Obama’s proposals to gut deferral on foreign tax earnings. From the release, “NAM calls new taxes on corporate foreign earnings a ‘disastrous proposal’,” the following are direct quotes from Engler:

President Obama’s proposal to impose more than $100 billion in new taxes on corporate foreign earnings will destroy jobs in the United States and make U.S. companies less competitive globally.

The rhetoric on this issue fundamentally misrepresents the nature of global taxation and global competition. At a time when our economy is struggling and thousands of jobs are being lost every month, imposing an additional tax on U.S.-based international companies would put them at a massive disadvantage and cost American jobs.

Limiting deferral and further restricting foreign tax credits would simply increase the U.S. corporations’ tax bill based on their overseas operations, making them less competitive against their foreign-based competitors. In turn, the impact would fall hard on U.S. companies, their suppliers and their employees here at home.

Here’s the White House’s summary of what the President is proposing. And headlines:

• New York Times, “Obama Calls for New Curbs on Offshore Tax Havens“
• Los Angeles Times, “Obama takes aim at offshore tax dodges“

Politically clever, perhaps, but divisive and counterproductive.

UPDATE (1:45 p.m.): A news release from the PACE Coalition – Promote America’s Competitive Edge — which includes the NAM and other major business groups, “PACE Coalition Seeks to Preserve a Level Playing Field for U.S. Companies Competing Abroad.”