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POINT Kerry identifies the problem, then proposes the wrong solution on corporate taxes. By STEPHEN SPRUIELL 04.04.04 3:06PM CDT John Kerry has made his plan for international tax reform the centerpiece of his campaign Web site. What's interesting to the free market conservative is that Kerry correctly identifies problems in the U.S. tax code, and then proposes a solution that is exactly backwards. According to Kerry's Web site, "The tax laws for income earned in foreign countries have been so complicated that the system is almost completely broken." Most conservatives have said this for years. In the first place, the U.S. is the only country in the developed world that taxes income earned abroad. This means that income earned abroad by U.S. companies is taxed twice: once by the foreign country in which the company is operating, and then again when the profits are brought home to the U.S. Kerry targets a part of the tax code that allows companies to avoid paying taxes on income earned abroad if the profits are reinvested in the foreign country of operation-a practice known as "deferral." This, Kerry's Web site states, "provides a substantial incentive for American companies to locate investment and jobs overseas." Adding to this incentive, Kerry rightly points out, are America's high corporate taxes-35 percent (not including state averages), compared to an average foreign rate of about 21 percent. Part of Kerry's solution involves cutting the corporate tax rate from 35 to 33.25 percent, thereby "Enhancing the competitiveness of U.S. companies by cutting taxes." If you're a fiscal conservative reading all this, you've got to be thinking, "What's not to like?" After all, Kerry has identified the problem correctly: a burdensome and complicated tax code that is driving corporate investment out of the country. And he has proposed cutting the high corporate tax rate that puts U.S. corporations at an international disadvantage. The problem is that Kerry proposes simplifying the tax code by making it more burdensome and complicated. Kerry proposes that we start by eliminating deferral. This would raise taxes on businesses and complicate the tax code further. Kerry's plan would "still allow companies to defer the income they earn when they locate production in a foreign country that serves that foreign country's markets," but not the income they use to locate production in a foreign country that serves America's markets by providing quality goods and services at low prices. By eliminating deferral in all cases except for those in which profits are reinvested abroad for the purposes of serving foreign markets, Kerry's policy would effectively subsidize foreign consumption. Kerry paints his international tax reform plan as a simplification by saying that it would eliminate this crazy practice called deferral. But deferral wouldn't be necessary if it weren't for the crazy practice of taxing U.S. corporations on their foreign income, something almost no other country does. A better policy would eliminate the double-taxation of foreign income altogether and reduce America's corporate tax rate to make it more internationally competitive. A true fundamental reform of the system would eliminate all corporate subsidies and welfare, yet end the practice of taxing companies unfairly on their foreign operations. This would also remove the incentive for the practice known as corporate inversion-when a company reincorporates abroad to avoid being taxed on its foreign income. But what is Kerry's solution to the problem of inversion? If you guessed "a more complicated tax code," you are sadly correct. Kerry would make inversions illegal, which would create a new set of regulations and, more importantly, do nothing to stop corporate flight. Corporations fed up with the tax code will still look for overseas headquarters, but unable to reincorporate abroad, they will simply sell out to foreign corporations. This happened when Chrysler found the U.S. tax environment too hostile and sold out to Daimler. It turns out that the corporate income tax rate cut that Kerry proposes would actually just go to cover the net tax increase that his proposed tax code complications would place on businesses. And in terms of economic effects, the small cut doesn't even begin to cover his proposed rollback of the dividends, capital gains and top-bracket tax cuts. U.S. international tax laws are badly in need of reform. Unfortunately Kerry, like many Democrats, sees more taxes and more complications as the answer. Rather than add burdensome regulations to corporations moving investment abroad, the right reform package would make the U.S. a more attractive place to do business by making the tax code simpler, lower and more internationally competitive. Stephen Spruiell is a first-year graduate student at the LBJ School of Public Affairs. |
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