Tax cut proponents want to encourage domestic employment by subsidizing American companies who employ foreign workers in overseas plants.
Cutting corporate income tax on foreign earnings puts companies that keep their production in America at a competitive disadvantage and encourages the continued hollowing out of the American economy.
The subsidy for moving production overseas has been euphemistically called a “repatriation tax holiday” but the only people who are going to get a holiday are unemployed Americans whose jobs will move overseas.
The problem with the repatriation tax holiday is that it will massively cut taxes on foreign corporate profits while not changing the tax rate on domestic profits. It isn’t hard to figure out what will happen. If the corporate income tax rate is close to 0% for foreign profits, but remains at 35% for profits made domestically, every company that can move overseas will do so. A 35% margin advantage by moving production overseas will be too much to overcome.
Tax cuts almost always sound good. Conservatives like them because it gives people more money to make their own choices, and some liberals like them because it’s a form of government stimulus. But not all tax cuts are created equal. Some, like the repatriation tax holiday, actually create incentives for bad economic behavior.
Tax holiday proponents argue that American companies won’t bring their foreign profits into the U.S. and invest in America because U.S. taxes on foreign profits are too expensive. It’s unfair, they say, to force American companies to pay U.S. corporate income taxes on foreign earnings because a foreign income tax was already paid. After all, why would anyone want to pay a tax on the same earnings twice?
Tax holiday supporters say that if taxes on foreign earnings are significantly reduced, U.S. companies will use their foreign earnings to fund a domestic investment renaissance. New York Senator Charles Schumer even thinks that the extra revenue could be used to fund an infrastructure bank.
But for some odd reason everyone who is advocating the tax holiday has forgotten that the tax code already contains a “foreign tax credit” which eliminates the double taxation of foreign earnings.
When U.S. companies pay taxes overseas they can claim a tax credit equal to the amount of foreign taxes paid or assessed. The effect of the tax credit is to reduce U.S. taxes by the amount of foreign taxes and keep the combined foreign and domestic tax burden the same as it would be for a domestic only taxpayer. If the tax holiday is enacted, the tax burden on foreign earned income by U.S. companies will be close to 0%.
The 0% tax rate won’t happen because foreign governments reduce their income tax rates or taxes collected. Taxes paid to foreign governments will still be paid, just indirectly by U.S. taxpayers through the foreign tax credit.
If tax cutters get their way U.S. companies that employ U.S. workers will be at a competitive disadvantage. U.S. employers that hire Americans will pay a 35%+ corporate income tax on their profits while U.S. companies that hire foreign workers will pay almost a 0% corporate income tax rate.
It’s just a common sense fact that if tax do-gooders were serious about creating U.S. jobs and investment they wouldn’t be talking about subsidizing U.S. companies to hire foreign workers.
If tax cutters were serious about supporting American jobs they be talking about tax increases on foreign profits and offsetting tax cuts on domestic earnings. A simple elimination of the foreign tax credit and a dollar for dollar domestic tax credit would do the trick.
For American workers struggling to compete in the global economy, the tax holiday proposal is insult on top of injury. American workers are trying to keep their jobs but are being asked to pay taxes that are used to subsidize employers replacing them with foreign workers.
American citizens should be demanding that their elected officials fight for American jobs and the American economy. It is unconscionable for any members of Congress to advocate a tax subsidy for U.S. companies so that they can hire foreign workers instead of Americans.
Congress needs to stop pandering to special interest groups that are hell bent on razing the American economy and start fighting for American workers.
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