Is the key to U.S. job creation the creation of jobs outside the U.S.?
It’s an important question, as the debate is sure to heat up over what tax rate U.S. corporations should pay on profits made in foreign countries. President Obama’s latest “grand bargain” suggests a small tax on profits held overseas, in conjunction with a lowering of the top corporate tax rate, in order to generate more revenue to pay for things like infrastructure improvement and job training here.
At issue are the estimated $2 trillion in overseas profits generated by U.S. companies that are not repatriated, or returned to American shores. Policymakers have bemoaned that companies make money in foreign companies but avoid having to pay federal tax on that income, which robs the U.S. Treasury of revenue. Companies have countered they already pay taxes on those profits in the companies where they do business, and, because of easier tax rules, that is an incentive to do even more business there.
As companies grow overseas because of the tax advantage, they create jobs in countries like Ireland and Bermuda – jobs many critics believe would otherwise be created domestically.
The economics of the situation, though, are more complex than that. Rather than robbing jobs, increased growth overseas actually helps companies domestically, which is good for both employees and investors.
Take current wages for those who already have jobs. A study looking at the relationship between host countries and their foreign affiliates showed the expected result that more foreign demand for products from U.S. companies leads to jobs overseas that are typically lower paid and less skilled than they would be if they were created here. However, at the same time, these jobs didn’t lead to more people put out of work here. Actually, the opposite happened: It led to an increase in home-country wages for U.S. workers.
Then there is job creation. In a working paper for the National Bureau of Economic Research, Greg Mankiw and Phillip Swagel found [http://www.nber.org/papers/w12398.pdf] that a move to more overseas jobs “appears to be connected to increased U.S. employment and investment rather than to overall job loss.” Rather than what one might believe from the rhetoric, companies “are not shifting jobs overseas but instead are creating jobs in the United States and in other countries,” the authors wrote.
So, there is economic literature that suggests overseas job creation is good for American workers.
Some say repatriation of profits is necessary to close some of the loopholes companies exploit when they shift business overseas to maximize their earnings. A common area cited is intellectual property. By placing that property in a low-tax country like Ireland, companies can save money on their tax bill whenever they generate revenue from the licenses sold against their IP.
There is also criticism of what’s known as transfer pricing, which companies use to value transactions among their subsidiaries in such a way to put the most profits in low-tax jurisdictions.
Companies willingly admit they make these moves and exploit these loopholes. Why? Because, under a free market system, one could argue they are required to. They have, after all, shareholders who expect profits to be maximized – whether these holders be public stockowners or private-equity investors. As long as the disparities exist worldwide in the way profits are taxed, global companies will always try to maximize their earnings.
Adding even a small tax to repatriated profits here doesn’t help. Companies already pay taxes overseas. Any added tax the U.S. government wants to slap on would be deemed unacceptable.
So the alternative is no tax at all domestically, creating a true territorial taxation system where companies can be free to bring money back to the states to use for investment here, while also reinvesting in other companies as they build their global enterprises.
Or, there is one more option: Do nothing. Just because companies have profits overseas doesn’t mean they would magically repatriate them and stimulate our economy. For one thing, that is bad business. They are in foreign markets not for tax reasons alone, but for business ones. There are customers outside of our borders and sales to be made. That’s why, when Congress allowed for a tax break on corporate profits back in 2004, many companies didn’t take advantage of it. There is growth overseas, so that is where the investment needs to be.
After all, if the current system isn’t hurting American job growth but rather helping and supporting wage growth to boot, is it really broken and in need of repair?