Closing Corporate Tax Loopholes

President Obama says he will close loopholes that let companies ship jobs and stash profits overseas, meaning that you pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.

Major corporations are arming for a brawl over overseas tax breaks that could be the year’s biggest clash between business and the White House.

Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce, says, This really is the mother of all schisms between the business community and the administration. It also could create massive fractioning among the business community. You have one set of interests for a company that manufactures in the U.S. but sells around the world, another set for one that manufactures abroad.

The Administration anticipates $220 billion over the next nine years by changing the taxation of foreign-source income, according to a Wall Street Journal article by Martin Feldstein.

Marty is a highly respected economist from Harvard University, and the president and CEO of the National Bureau of Economic Research (NBER). That's the group that officially determines when the US is in a recession.


While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland.

The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

The administration is likely to be disappointed about its ability to achieve both goals.

• Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets.

• American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms.

• That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S.

• The net result would be less revenue to the Treasury and fewer jobs in America.

Here is a good illustration from the Tax Foundation of how closing so-called "tax loop-holes" greatly hurts American enterprise.