Second Debate Marred by Protectionist Rhetoric

October 17, 2012

In the second presidential debate both candidates touched on outsourcing, China, and corporate taxes, but neither of the candidates got the whole story right.

Both candidates continue to demagogue China. Governor Romney says that he will put tariffs in place. Tariffs restrict free trade and raise taxes on Americans who buy Chinese-made goods, neither of which grow the economy or create jobs.

On corporate taxes President Obama said this:

“…both Governor Romney and I agree actually that we should lower our corporate tax rate. It's too high. But there's a difference in terms of how we would do it. I want to close loopholes that allow companies to deduct expenses when they move to China; that allow them to profit offshore and not have to get taxed, so they have tax advantages offshore.”

They are both right that we need to lower our corporate tax rate. It’s currently the highest in the developed world. And the President is right that we need to eliminate loopholes, but his proposal to target expenses specifically related to moving abroad is technically another loophole, according to the Joint Tax Committee:

“In general, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.”

Currently, there is no special provision in the tax code related to moving expenses abroad.  Businesses are generally allowed to deduct expenses, including moving expenses, whether it’s to Indiana or China.  The President is proposing to add a loophole here, as he has many times before, whereby domestic movers would enjoy a lower tax burden relative to international movers.  Perhaps the President would like to justify this on the basis of protectionism, but on loopholes he has no ground to stand on.

The President also repeated the claim that 800,000 jobs would be created abroad if we go with Romney’s proposal to switch to a territorial tax system, which exempts the foreign earnings of multinational corporations.  That number is based on one study, which is by no means definitive.  Besides, the author plainly states it does not mean jobs would be lost in the U.S., only that jobs would be created abroad.  We discuss this more here, here, and here.

For a more complete discussion of territorial taxation and the tax treatment of multinational corporations, see our recent study, which reviews the real world experience of territorial taxation in other developed countries.  There are plenty to choose from – all but 7 of the 34 most developed countries in the world have switched to territorial.

Follow William McBride on Twitter @EconoWill

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