In last night's State-of-the-Union address, President Obama called for the repeal of tax breaks for outsourcing jobs.
FULL TEXT: State of the Union 2012
Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.
So let’s change it. First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home.
In 1961, JFK also called for a repeal of the same tax breaks.
Does tax code send U.S. jobs offshore?
The deferral clause has been in the tax code for more than half a century and has outlasted numerous reform efforts. In April 1961, even as U.S.-backed rebels were dying at Cuba's Bay of Pigs, President Kennedy asked Congress to rewrite tax provisions that "consistently favor United States private investment abroad compared with investment in our own economy."
Maybe this will be the year that those tax breaks will finally be repealed. Or maybe Presidents will still be calling for this repeal 50 years from now.
Also, in last night's State-of-the-Union address, President Obama noted the lack of belief in the ability of our government to get things done.
FULL TEXT: State of the Union 2012
I recognise that people watching tonight have differing views about taxes and debt; energy and health care. But no matter what party they belong to, I bet most Americans are thinking the same thing right now: Nothing will get done this year, or next year, or maybe even the year after that, because Washington is broken.
Can you blame them for feeling a little cynical?
To answer the President's question, "No, I don't blame them for being cynical." In fact, I consider myself to be of similar disposition, though I wouldn't call it cynicism, which implies a habitual attitude of distrust and negativity. I would call it a rational lack of belief that is shared even by those who generally have an optimistic nature.
I'm not criticizing the President, but rather, our overall government. Like repealing those tax breaks, there are many good ideas that are ready to be plucked and yet go unplucked year after year. In fact, representational democracy itself is one of those good ideas that has still yet to be realized. And until we realize that latter idea, I fear that all the other ideas will remain on the tree, tantalizing ripe, within reach, spotlighted within inspiring speeches, and yet still on the tree year after year after year ...
The rest of this diary provides more detail about this tax loophole.
Someday, when we have a functioning democracy, perhaps, we can get ideas like the following implemented:
* Eliminate tax breaks that stimulate the offshoring of jobs.
This is an idea that I'm sure that 90% of the American people would support. Also, it would be very easy to create legislation that would eliminate these tax breaks. But under our current system, this legislation will never pass, because big business likes these tax breaks and Congress works for big business.
Here is an interview with former Democratic Senator Byron Dorgon, who unsuccessfully tried more than 3 times to remove these tax breaks:
Lou Dobbs transcript - Mar 17, 2005
PILGRIM: American companies that export manufacturing jobs to cheap overseas labor markets are actually rewarded with tax breaks under our laws.
Well, Senator Byron Dorgan of North Dakota introduced an amendment today that would repeal those tax breaks. The Senate defeated that amendment, 59 to 40. And Senator Byron Dorgan joins me tonight from Capitol Hill. Thanks for being here, sir.
....
DORGAN: Well, I'll have another shot at this. But it's really shocking when you think about it. We have this really bizarre tax code that says if you shut your American plant, fire your workers, move the jobs overseas, manufacturing the product and ship it back to the United States, we'll give you a tax cut for doing it. I mean, that's unbelievable to me. And it's also unbelievable that 59 members of the United States Senate think that should continue.
Also, this is not a divisive issue, because this positive change (i.e., removing tax breaks for overseas profits) is supported by people of all political persuasions.
For example, here are some quotes from a libertarian blog:
Mish Mailbag: IBM Abandons U.S. Workers - Apr 13, 2010
US Tax policy is another reason for outsourcing, and that can easily be addressed, at least in theory.
US corporate tax policy allows deferment of profits overseas, but profits in the US have a tax rate of 35%. This policy literally begs corporations to move profits and jobs, overseas.
... it would be far better from a jobs standpoint to defer taxes in the US than overseas.
Mish's 8-Point Alternative Plan - Jul 5, 2011
Every few years one or both parties proposes a corporate tax holiday to repatriate profits held by corporations overseas. Such actions must stop. All repatriation holidays do is encourage more outsourcing of jobs and capital, while corporations bide their time, waiting for the next tax holiday.
US companies that only do business inside the US are at a huge disadvantage to large corporations who can shift profits overseas.
These articles state that the tax law incentivizes the offshoring of jobs.
Could Tax Reform Boost Business Investment and Job Creation? - Nov 17, 2011
Our current deferral system provides tax incentives for overseas investments. In fact, it encourages U.S. companies to make job-creating investments offshore even if similar investments in the United States (absent tax considerations) would be more profitable.
Does tax code send U.S. jobs offshore? - Mar 21, 2008
"The U.S. tax system does provide an incentive to locate production offshore," says Martin Sullivan, a contributing editor to Tax Notes, a non-profit publication that tracks tax issues.
The following articles describe how this tax law is used to not only facilitate offshoring, but also to eliminate taxes for large companies.
Obama Seeks End of Corporate Tax Break to Raise $190 Billion - May 4, 2009
In 2004, U.S.-based multinational corporations paid about $16 billion in U.S. taxes while earning about $700 billion offshore, an effective tax rate of about 2.3 percent, according to the administration statement.
... The rules were originally designed to reduce paperwork for companies and the IRS by allowing companies to classify entities within their corporate structure in the most tax-efficient manner without inviting a tax challenge.
... Clinton administration officials realized they also had made it easy for multinationals to create entities whose only purpose was to shift profits into low-tax countries and out of reach of the tax authorities ...
... The nonpartisan congressional Joint Committee on Taxation recommended in 2005 that the rules be repealed.
What The Top U.S. Companies Pay In Taxes - Apr 1, 2010
The most egregious example is General Electric (GE). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.
Amazingly, this tax law has been around since the 1960s, despite many calls for reform over the years.
Does tax code send U.S. jobs offshore? - Mar 21, 2008
The deferral clause has been in the tax code for more than half a century and has outlasted numerous reform efforts. In April 1961, even as U.S.-backed rebels were dying at Cuba's Bay of Pigs, President Kennedy asked Congress to rewrite tax provisions that "consistently favor United States private investment abroad compared with investment in our own economy."
By accident, in 1996, the Treasury Department created a new regulation that made it easy for multinational companies to exploit the tax law.
Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break - Sep 26, 2011
The original idea was innocent enough—to cut red tape by making it easier for companies to decide how to categorize their subsidiaries.
In the mid-1990s, U.S. companies were creating a growing number of domestic entities. The new rule said that, by simply checking a box on IRS Form 8832, businesses could declare them as corporations or partnerships.
But within days of its announcement in 1996, tax lawyers were on the phone saying the Treasury Department had overlooked the international ramifications. Inadvertently, the government had provided a way for companies to move profits from subsidiaries in high-tax countries ... to ... other jurisdictions with lower or no taxes on certain kinds of income.
The tax laws and regulations still exists today, as a result of strong business lobbying.
Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break - Sep 26, 2011
By early 1998, the U.S. said check-the-box was being used to “circumvent” anti-abuse rules.
Treasury proposed new regulations—and corporate America erupted.
General Electric, PepsiCo, Morgan Stanley, Merrill Lynch, Monsanto and other major companies urged Congress to resist the change.
... It thrives thanks to determined business support, including a campaign two years ago that forced the Obama administration to retreat from altering it and tax professionals worldwide who exploit its benefits.
... “They knew the business community was going to push back. What they were really surprised by was how vehemently the business community reacted to it,” said Catherine Schultz, vice president of tax policy for the National Foreign Trade Council.
In summary, the tax laws/regulations exist, because ...
1) It helps big business to finance their initiatives to offshore American jobs to cheap labor markets with low environmental protections.
2) It helps big business to avoid paying taxes.
Yet, it is against the interests of Americans, because ...
1) It increases unemployment.
2) It shifts more of the tax burden onto the general public including small businesses.
It is important to realize that these tax laws/regulations would be repealed in one week, if we had a functioning democracy. And yet, more than 50 years have passed since JFK called for Congress to make these tax reforms, and the only change that has occurred during that time are new regulations that have made it easier for corporations to exploit the tax loopholes.
(By the way, I will be out for a few hours.)