Obama and Clinton share a pander on trade

Obama and Clinton appear to be offering parallel panders to working class voters in their promises to change the tax code to discourage job offshoring. Here are their promises:

Obama in Janesville WI , Feb. 13:

I'll pass the Patriot Employer Act that I've been fighting for ever since I ran for the Senate - we will end the tax breaks for companies who ship our jobs overseas, and we will give those breaks to companies who create good jobs with decent wages right here in America.

Clinton, Youngstown OH, Feb. 19:

Let's get real about keeping jobs right here in Ohio and America where they belong. As president, I will send a loud and clear message to any company shipping jobs overseas. If you take jobs away from the families of Youngstown, you'll pay a price because when I am president, you will never again be able to use our tax dollars to help outsource our jobs.

I can find no specifics on either the Obama or Clinton websites about how the candidates would end tax breaks for companies that ship jobs overseas. Obama's Patriot Employer Act works the other end of the equation, providing a tax credit equal to 1% of taxable income to companies that, among other things, "invest in American jobs, by maintaining or increasing the number of full-time workers in America relative to the number of full-time workers outside of America AND by maintaining corporate headquarters in America if the company has ever been headquartered in America" (Obama press release, Aug 2 '07). That's an incentive for desired behavior without reference to closing any currently existing tax breaks for "companies who ship our jobs overseas."

According to Factcheck.org, both candidates are targeting "a feature of the U.S. tax code that allows domestic companies to defer taxes on 'unrepatriated income.' In other words, revenue that companies earn through their overseas subsidiaries goes untaxed by the IRS as long as it stays off the company’s U.S. books. "

Does this mean that both candidates would revive something like John Kerry's 2004 proposal to limit the "deferral" of unrepatriated income described above? The Kerry proposal would have only allowed "deferral" when the profits are earned by producing and selling in the country where the subsidiary is based. In return, Kerry would have cut the US corporate tax rate from 35% to 33.25% -- an important aid to development, since US corporate taxes are higher than those of most competitors, including developed as well as undeveloped countries.

According to Factcheck.org, " economists, including left-leaning ones, do not agree that eliminating this provision will bring an end to off-shoring." For one thing, tax policy only marginally affects decisions about where to locate production. To the extent that tax incentives do operate, Gary Clyde Clyde Hufbauer and Paul Grieco of the nonpartisan Peterson Institute argued in depth in an April 2004 paper that the incentives in Kerry's plan were skewed and that the tax restructuring would not check job outsourcing. Here's the gist of their critique:

Relocating production in the United States...is unlikely to be the central response. Instead, MNCs [multinational corporations] would explore alternative ways to avoid the higher US tax burden and might well sell their operations abroad to foreign-based MNCs...under Kerry's plan, moreover, foreign-based MNCs would gain further tax advantages over US companies in worldwide markets--giving them a leg up in future expansion.

Among the likely workarounds to the new tax law, Hufbauer and Grieco predicted:

...they might sell their entire output to foreign-owned wholesale firms in the host country. Those firms would then handle the distribution to other countries, including the United States....[a foreign subsidiary, or CFC ] might price its out-of-country sales to related firms at bargain basement prices and claim the bulk of its earnings was derived from in-country sales. If all other avenues were closed off, then 'corporate inversion' would represent the nuclear option. By moving corporate headquarters overseas, former US parent firms could entirely escape the US tax net for their non-US operations...[or] the MNC might simply sell a majority of its CFC shares to a foreign partner. Once non-US parties own 51 percent of the foreign subsidiary, it ceases to be a CFC...and thus escapes the US tax net.

To the extent that Kerry's plan did succeed in driving production back to the U.S., it would place US multinationals at a disadvantage:

US MNCs...account for only one-fourth of world foreign direct investment in countries other than the United States. Plenty of competitors are willing and able to take their place if, for tax reasons, US-based MNCs are no longer able to competitively produce goods and services abroad for sale in the United States or third-country markets.

Interestingly, Obama's website includes a throwaway line that points toward a remedy that Hufbauer and Grieco recommend in place of Kerry's plan -- though the odds of getting it done are probably vanishingly small. Obama's Plan to Strengthen the Economy includes this promise:

Obama will also pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports.

That promise appears to be addressed at an imbalance in WTO rules that, according to Hufbauer and Grieco, severely disadvantage U.S. exports relative to foreign companies selling goods in the U.S. It's this:

Under current WTO rules, US exporters must pay on importing nations' value added tax (VAT), but foreign exporters selling the US market are exempted from their home-country VAT. WTO rules do not permit the United States to levy its corporate tax on exports. Correcting this archaic distinction between indirect and direct taxes....would significantly promote US production and jobs.

Good luck, though, getting a major rules change favorable to the US through the WTO.

Related post:
Obama gets down to tax brass