In the second presidential debate both candidates touched on outsourcing, China, and corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, but neither of the candidates got the whole story right.
Both candidates continue to demagogue China. Governor Romney says that he will put tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s 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 expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s 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 systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , 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 @EconoWillShare