This week President Bush is expected to sign into law tax legislation that could enormously affect U.S. competitiveness and job creation.
Many Democrats in Congress — the very people who have pummeled President Bush for not generating enough new jobs — voted against the measure.
Now for purposes of full disclosure, I will confess some of the turkeys that found their way into this bill are fatter than grandma’s Thanksgiving bird. There’s a buyout for tobacco farmers, a subsidy to native American whalers, continuation of the inane ethanol tax break, and even dollars for tackle box companies. Only two words come to mind in reading through the 600 pages: gobble, gobble.
But this corporate tax bill has two extremely beneficial pro-economic growth benefits. First, it would lower the corporate tax rate for domestic producers from 35 percent to 32 percent. Since the U.S. now has one of the world’s highest tax rates on our home-grown businesses, this tax rate cut will help keep businesses here and reduce incentives to flee abroad.
Even better is the provision to allow companies with overseas subsidiaries to bring those profits home to the U.S. at a one-time tax rate of 5 percent.
This homeland investment provision, originally conceived by Sen. John Ensign of Nevada and Rep. Phil English of Pennsylvania, would serve as a magnet for foreign capital and would cost the Treasury virtually nothing in lost revenues. It might even gain tax receipts for Uncle Sam.
The tax plan permits U.S. firms to repatriate profits they earned overseas back to the United States without having to pay the corporate income tax rate of 35 percent on this money. Instead, firms with large foreign profits — companies like Hewlett Packard, Pfizer, Microsoft and Sun Microsystems — could bring this investment capital into the U.S. and pay a one-time border entry tax of 5 percent. This means we make money on something we want firms to do anyway: invest profits in America.
How much new investment could we expect to get from this tax change? Independent analyses by Price Waterhouse Coopers and Bank of America predict a windfall ranging from $135 billion to $300 billion of new capital within a year of passage. That $300 billion is more money than collected by the entire corporate income tax structure. This money can be used to rebuild industry and factories here at home. Let’s call it corporate in-sourcing.
Currently, about $600 billion of U.S. corporate earnings are parked offshore to avoid the hefty tax penalty on bringing these funds back to America. Current U.S. tax law forces our companies to pay the Internal Revenue Service for bringing home income earned overseas. For example, a U.S. firm doing business in Germany pays an income tax in Germany, then pays additional U.S. income tax if the money flows back to the U.S. Thereby, that firm has an incentive to reinvest the profits in Germany, not here.
Victims of this policy are U.S. workers and shareholders in American firms. Shareholders lose because the tax penalty on corporate profits repatriated to the U.S. would largely disappear.
On average, it costs about $50,000 to $100,000 in business investment to create a new manufacturing job in the United States. This tax bill therefore could create as many as 500,000 new jobs next year for factory and technology workers.
History proves capital foreign investment is critical to job creation. Over the past 20 years, dating back to the Reagan tax cuts, the U.S. has imported about $1.5 trillion more capital to these shores than we have sent abroad. This in-migration of capital investment led to a boom in new factories, plant expansions, technology centers and industrial output.
For all the talk of “outsourcing of jobs,” for the last 20 years the U.S. has been a massive importer of jobs — thanks largely to falling U.S. tax rates, especially compared to Germany, France and Japan. That’s a key reason the U.S. has created 35 million new jobs since the mid-1980s and the rest of the industrialized world less than half as many.
The Kerry Democrats moan that this bill is a corporate tax giveaway. These very same Kerry Democrats complain in their next utterance that American firms who invest abroad for tax-saving motivations are “Benedict Arnolds.” But this tax plan gives multinational firms an incentive to bring investments back home. The problem is liberals face a conundrum: They love jobs, but abhor the idea businesses might make money.
Even conservative legislators will gag when they see the corporate giveaways nestled in this tax bill. Why Republicans in Congress believe every bill has to be a Christmas tree with goodies for every K Street lobbyist tucked below, is an enduring mystery.
But cutting taxes on business helps create jobs. And the homeland investment provision brings hundreds of billions of dollars of investment capital into the U.S., which means better- paying jobs. Only a Benedict Arnold could be against that.
Stephen Moore is president of the Club for Growth.