More on economic patriotism

Something I should have mentioned in my previous post on Obama's "Patriot Employers" plan is the possibility, indeed the likelihood, that the arrangements he's proposing are at odds with US treaty obligations under the WTO. Of course I understand that this only makes the idea even more attractive to hardline anti-trade types, Democrat and Republican alike. But I keep being told that one of the reasons for supporting Obama is that he would improve and even transform relations with America's friends abroad. If he hopes to do that, picking an immediate fight over existing trade agreements might not be the best way to start. (I thank a European diplomat who would doubtless prefer to remain nameless for drawing this to my attention.)

International legality aside, why is the idea such a bad one? The plan appears to have two parts: cut taxes for companies that meet some tests of good behavior, and (to make good the revenue shortfall) raise the tax that US-based companies have to pay on profits earned abroad. The first is the kind of leaden-handed intervention that I had hoped Obama would avoid. The second reprises a discredited idea of John Kerry from 2004.

Let me refresh your memory about that earlier debate. At the moment, foreign investments by US-based companies are usually taxed at a lower rate than would apply to profits earned at home. Why? Because America's corporate tax rates are higher than the rates typically levied by other countries. Making the US-based company pay the full US domestic rate (ie, the foreign tax, plus a margin to make up the difference) on overseas profits would, it is true, eliminate the tax incentive to invest those profits abroad. But it would also encourage US-based companies to divest their foreign activities outright, and it would put US companies that did continue to operate abroad at a significant disadvantage to their foreign competitors. Realistically, tax avoidance is only one factor, and usually not the main one, in investment decisions of this kind, so the effect of this change on jobs and wages might not be great either way--but I'd guess it more likely to be negative than positive.

Here is a good analysis of the Kerry proposal by Gary Hufbauer of the Peterson Institute for International Economics. On the broader issue of outsourcing--what to do about it, and how much of a probelm it is in the first place--I recommend this paper by Greg Mankiw and Phillip Swagel.