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HOWARD AND FEYMAN: Obama’s ‘green economy’ doesn’t create high-paying jobs

U.S. needs better tax incentives to attract business

- - Thursday, October 25, 2012

During his four years in office, President Obama consistently has called for more high-paying jobs. Unfortunately, rather than getting the economic policy right that would help create those jobs, he's become America's venture capitalist in chief, picking winners and losers. Mostly, as GOP presidential nominee Mitt Romney quipped recently, he's picked losers.

For Mr. Obama, the pursuit of "good-paying jobs" has often meant making unsustainable, but politically correct, "investments" in "green" jobs. For instance, the president and Democrats in Congress doled out $90 billion in subsidies on the renewable-energy sector. Economists have questioned the effectiveness of this spending, noting that many jobs simply were reclassified as "green" and many others were part-time jobs. The green economy also has turned bright red as government-backed companies, including Solyndra and A123 Systems, have gone bankrupt, and others only survive thanks to massive, ongoing taxpayer subsidies.

Rather than chasing political fads, policymakers in Washington can help generate good jobs by getting the fundamentals right and making the United States the most attractive place to invest for large and small companies alike. This also would play into America's inherent strengths, leveraging our advantages in high-tech, high-paying industries such as pharmaceuticals and biotechnology.

The United States has the world's largest and most innovative pharmaceutical industry, but it's not reaching its full potential, in part because of poor tax policy. The average compensation of a worker in the pharmaceutical industry is almost $120,000 annually -- more than twice the U.S. private-sector average. Leveraging our competitive advantage in this sector would go a long way toward creating the jobs America needs.

Here's where Mr. Romney's tax reform plan outperforms Mr. Obama's: Both candidates agree that we need corporate tax reform, and both support a lower U.S. statutory tax rate, currently one of the highest in the world. However, the president would extend America's worldwide tax system, instituting a minimum global tax on multinationals, while Mr. Romney would move us toward a territorial system, under which only domestic earnings would be taxed at the domestic rate.

America is one of just seven (out of 34) Organization for Economic Cooperation and Development countries with a worldwide tax system. Under this system, when U.S. companies earn profits operating abroad, those foreign earnings are subject to taxation under foreign jurisdictions -- but they're also subject to taxation at the domestic rate, with credits for payments made to foreign governments. As a result, U.S. companies operate at a disadvantage when competing abroad. Because foreign earnings are taxed only when they are repatriated, companies have less incentive to bring money back to the United States. As a result, companies hold $1.7 trillion in undistributed earnings abroad.

Of the largest U.S.-based pharmaceutical companies, 10 hold more than $260 billion abroad. This money does little for the American economy, and the companies pay no U.S. taxes on it. Mr. Obama's proposal would indeed raise government revenue from those companies -- around $72 billion -- but it also would make U.S. companies even less competitive when operating abroad. In fact, it would dramatically increase incentives for multinational companies to keep or move their headquarters abroad.

Under the Romney tax reform plan, the picture would change quite a bit. If we assume that just a quarter of revenues are brought back -- a fairly conservative assumption -- that's $65 billion returning to the U.S. private sector. The tax revenue from this repatriation would be relatively small -- around $800 million (assuming 95 percent dividend exclusion and a top rate of 25 percent, leaving an effective rate of 1.25 percent) -- leaving most of that $65 billion for companies to reinvest in the domestic economy. This money would fund high-paying jobs in the pharmaceutical sector and research and development, increasing America's competitive advantage.

Scale this model up to the entire American economy, and you've got a real engine for economic recovery.

Mr. Obama and other critics of a territorial tax system claim this model would create jobs abroad. What Mr. Obama neglects to mention is that those jobs would be created along with, not in place of, American jobs. What we can say for certain is the president's plan would discourage domestic job creation, encouraging companies to leave the United States. A territorial tax system also puts us in line with international tax trends, including those embraced by our most advanced competitors.

To be sure, corporate tax reform is not a panacea for America's economic woes. Entitlement and regulatory reforms also are needed to balance the federal budget and reduce the barriers entrepreneurial companies face. But substantive tax reform that rewards, not punishes, domestic investment in leading industries such as biotech and pharmaceuticals would go a long way toward creating the high-paying jobs Mr. Obama so often says he wants. His opponent already understands this.

Paul Howard is the director of the Manhattan Institute's Center for Medical Progress and a member of Mitt Romney's Health Care Advisory Group. Yevgeniy Feyman is a research associate with the Manhattan Institute for Policy Research.