Higher Taxes on Multinationals Would Hurt US Workers and Exports

Policy Brief
10-10
May 2010

President Barack Obama declared in his State of the Union address-echoing the rhetoric during his days as presidential candidate-that "it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America." Do US multinationals deserve tax punishment because they "ship jobs overseas"? Hufbauer and Moran cite studies that compare US firms engaged in outward investment with similar firms that stay at home. They conclude that outward bound firms consistently export more from the United States than the home firms. If US tax policy were changed so as to hinder outward investment by US firms, evidence indicates US export performance would be weaker, not stronger. These tax changes would not lead to more investment at home either. The best bottom line for American workers-and the American economy as a whole-is to keep the United States a favorable location for American multinationals to do business. The plants of US multinationals are the most productive in the United States, most technology-intensive, and pay the highest wages.

In contrast to most countries that maintain simple territorial tax systems, either de jure or de facto, the United States subjects its multinationals to worldwide taxation. The United States should align its taxation of multinationals to the territorial norms of foreign competitors-from France and Germany to Brazil, India, and China. It should adopt its own version of territorial taxation and allow US-based multinationals to repatriate dividends from their foreign subsidiaries at a flat rate of 5 percent, with no foreign tax credit. This was successfully tried for 2005 in the American Jobs Creation Act of 2004 (the AJCA). The result was a gush of repatriated income, around $300 billion, and revenue that the US Treasury would never have seen. In 2010, the Congress should lay aside the administration's proposals for punishing US multinationals with higher taxes and instead make the AJCA tax of 5 percent on repatriated dividends a permanent part of the tax code.