TAX FIGHT LOOMS Administration wants to
CURTAIL TAX BREAKS for U.S. multinationals GLENN HESS, C&EN WASHINGTON
PRESIDENT Barack Obama’s plan to raise
hundreds of billions of dollars through increased taxes on business to slow a ballooning deficit is colliding with his effort to spur the economy and boost employment by promoting U.S. exports, industry leaders say. Rolled out as part of the fiscal 2011 budget proposal are a series of new taxes, reinstated taxes, and a significant reduction of multinational corporations’ ability to defer taxes on overseas earnings. It is feared that such tax policy reform will impede economic growth and make it TAX REFORM The Administration says harder to create jobs and lower The President’s goal for a it is committed America’s near double-digit unnew trade policy that focuses to rolling back employment rate. incentives that shift on export growth is welcomed The proposed changes to the by U.S. business. “We are U.S. investment overseas. U.S. tax code bump up against pleased the Administration Obama’s recently announced inishares our view that exports tiative to double exports in five are critical to manufacturers’ years, a jump that would push U.S. overseas competitiveness and ability to grow and sales to $3 trillion annually and, the White create jobs,” says John M. Engler, presiHouse says, create 2 million new jobs. dent of the National Association of ManuBut chemical industry executives confacturers, the nation’s largest industrial tend that Obama’s budget would discourtrade group. age job creation by adding new costs to But officials worry that the tax increases business. “Unfortunately, the Administraincluded in the Administration’s budget tion’s proposed budget will unduly impact will undermine any hope for an export-led the business of chemistry by imposing new economic recovery. “New taxes would or reinstating former taxes that will hurt mean fewer American jobs and less revAmerica’s chemical industry at a time of enue at a time when we desperately need economic fragility,” says Calvin M. Dooley, both,” Dooley says. president and chief executive officer of the The President’s proposed 2011 budget, American Chemistry Council (ACC), an unveiled on Feb. 1, calls for almost $500 industry trade group. billion in new taxes on businesses over the “Contrary to the President’s stated goal next 10 years, including a $19 billion reinof doubling U.S. exports, the new taxes on stated Superfund tax on most corporations companies that export would mean higher to help pay for the cleanup of abandoned costs for U.S. producers and less ability toxic waste sites, and an additional $39 bilto compete in the global market,” Dooley lion in tax increases on energy companies. asserts. Another $59 billion in tax revenues Obama’s trade initiative, first announced in his State of the Union address on Jan. 27, would require sustained export growth of about 15% per year, a pace that trade policy experts say is ambitious but achievable.
would be raised by eliminating firms’ ability to use the last-in, first-out (LIFO) inventory accounting method. Under LIFO, corporations are able to defer tax liability by deducting the higher cost of recently acquired inventory rather than the lower cost of older inventory. But the most costly change would generate $122 billion for the government by overhauling a long-standing international tax policy that Obama and some congressional Democrats argue provides incentives for U.S. companies with worldwide operations to move production and jobs offshore. “To encourage businesses to stay within our borders, it’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the U.S.,” the President declared in his State of the Union message. ONE KEY ISSUE is the U.S. tax code’s
treatment of profits earned by foreign subsidiaries of U.S.-based multinational corporations. Profits earned in the U.S. are subject to a combined federal and state corporate tax rate of 39.1%, the secondhighest among industrialized countries. Only Japan’s 39.5% combined rate is higher. However, under the so-called deferral rule, multinationals can deduct expenses related to their overseas operations, but defer paying taxes on the profits from those operations until the money is transferred back to the U.S., usually in the form of cash dividends from the foreign subsidiary to the parent company. As a result, many companies keep money abroad for an extended period to avoid paying the taxes. The Administration says that is depriving the U.S. government of much-needed tax revenue. Last year, Obama sought to tighten the rule by proposing that companies must also defer taking deductions until their overseas profits are brought back to the U.S. But the revenue-raising initiative fell flat in Congress amid furious opposition from affected industries. Now, the Administration is limiting its
“A huge tax hike on U.S. employers is not the way to stimulate our economy.”
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SHU T T ERSTO CK
GOVERNMENT & POLICY
proposal to interest expenses. Deductions tax rates, says Stephen G. Elkins, ACC’s including less complexity and easier planfrom interest expenses related to deferred director of tax policy. ning,” Elkins says. “But unless the corpoforeign income could be taken only when “The bottom line is that the provisions rate tax rate goes down substantially, we the deferred income is recognized in the in the President’s international tax procould be in worse shape than we are now.” U.S. “The ability to deduct expenses from posals would raise the level of tax on the Reforming the corporate tax system overseas investments while deferring U.S. foreign operations of U.S. corporations,” requires balancing neutrality between tax on the income from the investment Elkins remarks. “That makes us less comforeign and domestic production with inmay cause U.S. businesses to shift their petitive because we are carrying a heavier ternational competitiveness, notes Robert investments and jobs overseas, harming tax burden than our competitors.” Carroll, senior fellow at the Tax Foundaour domestic economy,” the President’s tion, a nonpartisan group that monitors budget states. ANY CHANGES, Elkins adds, should be fiscal policy. “We do not want our tax law Advocates for international tax reform addressed as part of a package overhauling to favor foreign production over domestic argue that allowing U.S.-based global comthe entire tax system. “These issues are too production, and at the same time, we do panies to defer paying taxes on income complicated and there is too much risk for not want to put U.S. companies with forearned abroad is unfair to other businesses great economic dislocation if structural iseign operations at a disadvantage when and average citizens who must make up for sues, such as the way the U.S. taxes foreign they compete abroad with foreign compathe lost revenue. operations, are taken in a piece-by-piece nies,” Carroll says. “The reality is that when companies fail basis in an attempt to fill in some revenue The U.S., he points out, is the only large to pay their fair share of taxes, the burden gap in whatever tax or budget bill is before economy that taxes companies on worldis passed on to ordinary taxpayers. It’s time the Congress,” Elkins says. wide profits with a tax rate exceeding 30%. for the law to catch up to reality,” says NiIndustry officials and some tax analysts Meanwhile, more than 80% of developed cole Tichon, the tax and budget reform adalso say that any increase in international nations have adopted territorial systems, vocate for the advocacy group U.S. Public taxes or the elimination of current deducin which they tax domestic companies Interest Research Group. tions and exemptions would need to be only for income earned at home. This gives Business executives counter that the offset by a reduction in the corporate rate multinational companies based in those deferral provision and other preferences in so the competitiveness of U.S. companies countries “a major tax advantage over U.S.the tax code prevent U.S.-based multinaoperating abroad is not undermined. based firms that are saddled with a worldtionals from being double-taxed by the U.S. “Going to a flatter corporate tax regime wide system,” Carroll says. and by foreign countries. They note that has many attractive ideas attached to it, Enacting tax reform this year will be an major U.S. trading partners, such uphill climb, according to Elkins. as the U.K., France, Japan, and “I hope Congress will focus its COST OF BUSINESS Germany, do not tax their compaefforts on effective legislation to The U.S. has the second highest corporate tax rate nies’ foreign income. enhance the economy. I don’t see Deferral has been mischaracmuch likelihood of a comprehenJapan terized as a tax break, says Martin sive, broad-based structural set U.S. A. Regalia, chief economist at the of changes in business tax law. I France Belgium U.S. Chamber of Commerce, the don’t think they have time or incliCanada nation’s largest business federanation to do that this year.” Germany Australia tion. “Since other countries don’t But with the Administration’s New Zeland subject their companies to double need for new sources of revenue Spain taxation, U.S. companies need to fund its increased spending, Luxembourg U.K. deferral to stay competitive in the Elkins says the chemical industry Italy global marketplace,” he says. is worried that the government Mexico Norway “When you limit deferral, you “will enact some things that are Portugal limit the ability of U.S. companies terrible tax policy and would be Sweden to compete, you impede growth very damaging.” Finland Netherlands in the U.S. economy, and you Congress will have to tackle the Austria cause the loss of jobs—both at the expiration of former president Denmark Greece companies directly impacted and George W. Bush’s individual tax South Korea companies in their supply chains,” cuts at the end of this year, providSwitzerland Regalia continues. “A huge tax ing an arena where debate over Czech Republic Hungary hike on U.S. employers is not the corporate taxes could surface. Turkey way to stimulate our economy.” Imposing new or reinstating Poland Slovak Republic The Administration’s proformer taxes “could very well Iceland posed changes to the rules for result in a fundamental retrenchIreland U.S. taxation of foreign earnings ment of this industry,” Elkins de0 10 20 30 40 would deepen the disadvantage clares. “We’re very concerned that Combined corporate income tax rate 2009, % U.S. companies already face in dramatic corporate tax increases SOURCE: Organization for Economic Cooperation & Development competing against rivals from would have a long-term, perhaps countries with lower corporate permanent effect.” ■ WWW.CEN-ONLINE.ORG
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