Democrats: No Time to Lower Taxes, Just Time to Raise Them

Senate Democrats have such aversion to extending the Bush tax cuts for individuals that they're putting it off until after November elections. Instead, they're far more eager to move along a measure that would impose higher taxes on multinational corporations, which is being considered this week. The "Creating American Jobs and Ending Offshoring Act" purports to save U.S. jobs, but it will likely do U.S. firms more harm than good.

Last week my colleague Derek Thompson wrote on this legislation, calling it possibly, "the worst jobs bill yet." It seeks to provide tax breaks to American firms that bring jobs home from overseas. As his sources indicated, however, it will probably have a negligible effect on unemployment. In most cases, the economics still won't work to replace foreign workers with domestic ones. But the bill also seeks to resurrect a measure that died after being proposed by the Obama administration in 2009. It would raise taxes on those same multinationals.

The proposal was being hotly debated right around this time last year. Its authors say it closes tax "loopholes" by ending deductions. In reality, this measure would prevent U.S. multinationals from being as competitive overseas. U.S. corporate tax rates are often higher than those in other countries. As a result, current law allows U.S. firms some leeway in how they declare their overseas income, so that they are able to pay fewer taxes and better compete in those foreign markets.

As currently written, these rules would only apply to those firms that send U.S. jobs overseas. But how exactly is that determined? Surely, there's some practical difficulty in knowing whether a job was necessarily shipped overseas. Instead, the new tax rule will likely have to be more broadly applied, at the cost of many multinationals. If a firm closes a factory in the U.S. and open one in Malaysia, then it will get hit -- even if the jobs in both factories are completely different.

But even beyond this logistical difficulty, does this make any economic sense? For example, if a multinational firm sees weaker demand in the U.S. for its product, but notices that demand in Sri Lanka for that same product is growing, isn't it logical to put a factory in Sri Lanka if manufacturing on-site is more effective for distribution? Even though there's now a higher tax burden in place that such firms must face, the long-term economics will likely stay the same.

So if this bill succeeds, what you'll probably get is large U.S. firms generally finding it difficult to expand globally during this period. If they do so, then they'll often be subject to higher taxation. At the same time, they won't sense enough demand to grow domestically, due to the weak consumer sentiment. What will result is stagnation. It's hard to see how that helps the U.S., since that additional global revenue would likely have brought more profit home to be spent on domestic investment or spending. Instead, firms will just pay that profit to the government in the form of higher taxes.