When last we left the subject, Governor Romney’s “jobs” plan consisted of “five major proposals” for Congressional action in the first 30 days, one of which was the ratification of the Trans Pacific Partnership agreement — or NAFTA on Steroids. Romney’s proposed “Open Markets Act” would reinstate the Trade Promotion Authority to facilitate the agreement. What we see herein is a pattern that will be repeated in the other four elements.
In order to believe that Governor Romney’s proposals will create jobs, one has to accept the premise that promoting the interests of corporations will necessarily cause the generation of wealth which will in turn be invested in the expansion of industrial or commercial enterprises — yielding more employment. There’s just one problem with this premise.
It hasn’t worked for 30 years. What we’ve witnessed during the last three decades is the rise of Financialism, and the prospect that ever more wealth will accrete to the financial sector (increasingly trading with and for itself) without necessarily causing more industrial or commercial expansion.
However, fiscal facts notwithstanding the next piece of Governor Romney’s proposal to create more jobs is to cut the corporate tax rate to 25%.
The Tax Policy Center summarized the Governor’s proposal:
“At the corporate level, the Romney plan would make two major changes: 1) reduce the corporate income tax rate from 35 to 25 percent and 2) make the research and experimentation credit permanent, It would also extend for one year the full expensing of capital expenditures and allow a “tax holiday” for the repatriation of corporate profits held overseas. The plan does not specify, however, whether repatriated earnings would face any tax and, if so, at what rate. In the longer run, Gov. Romney would reduce the corporate rate further in conjunction with base broadening and simplification and would move the corporate tax to a territorial system.” [Tax Policy Center] (emphasis added)
Here we go again. In order to see this proposal as “job creating” the premise must be accepted that reducing corporate taxes automatically means more hiring. It doesn’t. The canard is that if corporations pay lower taxes they will necessarily invest in expansion of their commercial or manufacturing enterprises — they haven’t.
If lower corporate tax rates were the Answer to employment issues then because we now have the lowest corporate tax rates in decades we should be awash in jobs jobs jobs jobs.
The Wall Street Journal noted: “Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That’s the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.” (2.3.2011) (Emphasis added)
Therefore, what Governor Romney is proposing is nothing more than the voodoo economics of the Bush Era — just more of it. If the effective corporate tax rate under the current 35% now stands at 12.1% in FY 2011, then how much lower might the corporate taxes be under a 25% proposal?
Let’s look at the next two pieces of Governor Romney’s plan to “create jobs” (1) repatriation and (2) territorial taxes. [TPC]
Slate explains the repatriation issue, concerning income earned abroad by local or regional sales in foreign countries by U.S. based companies:
“…tax is paid only on American income based on US-based operations. And obviously US-based multinationals are happy to not pay those taxes. The problem arises, however, because in order to use those profits to pay a dividend or acquire a US-based company you would need to bring those foreign profits home and pay taxes on them.”
Want an incentive not to add in foreign income to U.S. corporate balance sheets? Repatriation! All one has to do is sit on the cash in foreign lands, wait for a Holiday and then bring it all back in for free. The Chamber of Commerce fondly cites a study saying the Tax Holiday idea could create 2.9 million jobs and add $360 billion to the GDP, however the study is not without controversy.
First, the money isn’t “just sitting there.” Edward Kleinbard, corporate tax expert, and former chief of staff for the Joint Committee on Taxation observed: “A large portion of these earnings is kept in liquid investments, and those in turn invariably are in U.S. dollar liabilities of U.S. borrowers, like U.S. bank deposits, commercial paper, and Treasuries. All those investments already are fully at work somewhere in the U.S. economy,” Kleinbard said.”
Secondly, there are some serious issues with how repatriation or tax holidays would impact the real economy.
“The Joint Committee on Taxation estimates that a repatriation “holiday” could boost revenue by about $26 billion over the first three years — but lose as much as $80 billion over the next decade.
And the Senate’s permanent subcommittee on investigations, which Sen. Levin chairs, released a report this week that said the 2004 tax holiday resulted in a loss of nearly 21,000 jobs among the top 15 repatriating corporations, and cited other studies which found no evidence that the holiday increased overall employment.” [CNN money]
“In 2005, corporations were allowed to repatriate their foreign earnings at a tax rate of 5.25 percent. Corporations did indeed bring home over $300 billion in foreign profits that year, five times as much as normal. But very little of that income was reinvested in the United States to create jobs: a National Bureau of Economic Research study suggested that a majority of that income went to shareholders, mostly in the form of share buybacks.” [Brookings]
Thus we have the Chamber of Commerce citing its positive study, and the Joint Committee on Taxation reporting other studies showed job losses instead of expected gains — one of the problems when ideology meets reality. Repatriated funds are of no use in boosting employment when the preponderance of them are used to increase stock prices via stock buybacks.
Territorial tax scheming has some interesting and some appalling features. On the positive side a territorial tax regime could have some benefits:
“…under such a system, foreign-source income would be taxed only in the country where it was earned, and would not be taxed at all by the United States. This approach would reduce the tax burden on American corporations and eliminate the disincentive for corporations to repatriate their foreign profits.” [Brookings]
Good so far. However, there is a really big caveat — this works IF the corporations aren’t allowed to engage in some creative income shifting. The Brookings paper explains how the income shifting is conducted in corporate America:
“In particular, corporations can fairly easily shift earnings attributable to intangible sources-patents, brand names, or know-how-to tax havens that collect little or no tax. Under a territorial tax system, the U.S. would never collect taxes on that income either.
“Although existing tax laws try to prevent such shifting, they are imperfect at best. An IRS study found that U.S. corporations’ subsidiaries in Bermuda reported income in 2004 equal to a whopping 646 percent of Bermuda’s GDP. Presumably, most of that profit was actually earned in a higher-tax jurisdiction; U.S. corporate profits are roughly equal to 10 percent of U.S. GDP.”
No wonder the Republicans are in favor of Territorial tax schemes. However, all is not lost. If the Obama Administration’s proposal for an “international minimum tax” is added to the mix, then the Brookings analysis points out:
“Under his proposal, all income of U.S. corporations must be immediately taxed-by the U.S., or some foreign country – at a rate greater than or equal to the (as yet unspecified) international minimum tax rate. So, if a corporation reported profits in a country that collects no corporate tax, the United States would immediately tax those profits at the international minimum tax rate-greatly reducing the appeal of the tax haven.”
Given the All or Nothing attitude displayed in the GOP controlled House of Representatives, putting a territorial system + tax haven disincentives together in one bill will require some extremely heavy political lifting.
We should keep in mind that the territorial proposal without any mitigation from a minimum tax insertion, merely serves to encourage income shifting and the promotion of off shore tax havens. ‘Just what some folks in the Hamptons would love.
We should also bear in mind that what Governor Romney is calling a “job creation” proposal would more accurately be labeled a tax reduction plan which he hopes might could would should in some idealized ideological world of Trickle Down economics produce the job growth we want IF it works — we’re still waiting for the tax reductions on corporations and wealthy individuals to work from the last round.