Funding universal healthcare with offshore profits?Policy

As the healthcare debate begins, all sorts of interesting schemes and ideas are going to come to light. The one most recently brought to my attention is to make it tougher for U.S.-based companies to compete overseas, which might cost the U.S. jobs here at home.

The Obama administration wants to increase taxes on U.S. business who profit by also doing business abroad. The proposed increase in taxes has prompted some, including Microsoft, to state that the measure would move jobs out of the U.S.

Why does Obama want to raise taxes on businesses to the tune of $200 million?

Of course, to pay for Universal Healthcare!

Not only will the universal healthcare plan, because it is government subsidized, cause small business to chuck existing plans (some which are better), but now we want to pay for it by pushing U.S. jobs overseas?

How, exactly, is this plan going to be good for the U.S. worker again?

  • tx2vadem

    JR,

    We currently tax offshore profits. The uniqueness of our tax code is that we tax global income. Multi-national corporations get a break through if they don’t repatriate foreign earnings; they can defer tax on those earnings. His proposal would be to end that deferral. I’m not saying that it is right, just clarifying your statement.

    I’m not understanding Microsoft’s argument that this would cause them to move jobs out of the US. The proposal would increase taxes remitted for foreign earnings thereby putting their foreign earnings on the same tax footing as their domestic earnings. So, what would shifting some employees around do? And why would this create an incentive for them do so?

  • http://bearingdrift.com J.R. Hoeft

    I appreciate your comment, Tex, but when you remove the deferral, it means you have to pay the tax. To me, that’s a tax increase.

    As for the Microsoft argument, they’re saying they will have higher costs with the higher taxes, therefore, they will move some of their existing operations here in the states overseas where those operating costs may now be lower because there is no longer a tax incentive to do business in the U.S.

    At least that’s what I think is being said. I’m not here to defend Microsoft, merely to show that Obama wants to pay for UHC by raising taxes and potentially causing the U.S. to lose jobs.

  • tx2vadem

    Oh, I know you aren’t here to defend Microsoft’s argument. But it still doesn’t make sense. Ending the deferral increases the cost of doing business abroad, not domestically. I guess in a round about way they’re saying that they would have to reduce payroll costs to recoup the cost of the tax. But even that doesn’t make sense. If it is cheaper to locate your employees in India today, what is keeping you from locating them there right now? Certainly a deferral on earnings not repatriated isn’t holding them back.

    It does go without saying that taxes will have to be raised to pay for this health care bill. It’s just a matter of what taxes those will be. I think eliminating a deferral on corporate tax returns would be more palatable to the American public than the main proposal of taxing health care benefits. Plus, that is really the more hard hitting critique anyway. After blasting McCain for daring to mention taxing health care benefits, he is now open to putting that into the bill to pay for it.

  • http://www.littledavidobermark.blogspot.com/ LittleDavid

    J.R.,

    Didn’t you mean to say $200 billion instead of $200 million in tax increases?

  • http://www.littledavidobermark.blogspot.com/ LittleDavid

    I am going to wade into this debate with only a rudimentary understanding of the issues. I think others’ understanding is also rudimentary, however perhaps together we can better get a grip on the issues at stake.

    It is my understanding that there are measures/laws that prevent a corporation from moving offshore to avoid paying taxes such as this while continuing to do business here. You can’t escape the taxes by putting your taxes in Bermuda while still largely being a United States company.

    However some companies might be motivated to completely close up shop here in the US and move everything offshore. You sell all your assets, move EVERYTHING somewhere offshore and then just export your products to the United States.

    Why would such a company do this? Because nearly every other country in the world offers the tax advantages that Obama is proposing taking away from multinational corporations based in the United States.

    What is to keep a corporation from doing this? If the majority of their operations are already overseas, why should they continue to manage these operations here from the United States? If they just brush their hands because doing business FROM the United States becomes so difficult, why not just take the operations elsewhere?

    We’re already chasing the good paying manufacturing jobs offshore. Do we now also want to chase the management of these operations offshore?

    Anyone more knowledgeable then me is encouraged to contribute. I will appreciate additional education on this subject.

  • J

    “We currently tax offshore profits. The uniqueness of our tax code is that we tax global income. Multi-national corporations get a break through if they don’t repatriate foreign earnings; they can defer tax on those earnings. ”

    This isnt exactly right when comparing us to other nations. Currently, we esentially double tax incomes of multinationals from other coutries when funds are repatriated to the US. Virtually all other major nations only tax the activity that occurs in their borders, so for instance, Microsoft’s subsidiary in India pays Indian taxes. What our system does is cause companies to pay the local countires tax and then pay an addition US tax if you reinvest those profits in the US. So getting a “tax break” really isnt accurate. Foreign firm’s US subsidiaries, ie Toyota North America pay US income taxes in the US, but any profits can freely be brough back to Japan if Toyota sees fit. If this goes through, it is going to make US multinationals considerably less compeditive to other multis and will destory much of the production linkages. Certain aspects of production are more cost effective to move over seas, other are more cost effective to do here (on an output per cost of unit of labor calculation). If companies are now penalized for reaching those optimizations, the entire cost of production goes up putting our firms at a disadvantage to foreign companies. So for instance the already damaged GM will get hit by this and Toyota will not. As a side effect you are going to see more multis moving their headquarters to other countires aka Haliburton.

  • tx2vadem

    LittleDavid,

    For anyone that currently has most of its operations overseas, it may make sense for them to move their HQ outside the US to avoid the global taxation of income. But that depends on the taxation levels in the other countries you operate in and how you are currently taking advantage of the US Corp Tax Code plus any incentives you get from the locality your HQ is in. Even without the non-repatriation deferral, you get credits for foreign taxes paid which could offset the entirety of your US tax liability on those earnings if the combined income tax rate in that country across all of its jurisdictions match or exceed the US income tax rate. You also get to group those credits by income buckets so there are many corporations that have excess foreign tax credits that show up in Note 14 to their financial statements.

    In the case where you were paying a lot of US tax on the earnings of foreign affiliates, it would make sense to nominally relocate your HQ to a post office box in Bermuda (like Accenture, for example). The purpose of this is not to avoid US taxation all together, just to avoid taxation on your global income.

    People would choose to stay for a number of reasons though (not necessarily having anything to do with taxation). First and foremost being connected to the country. Management lives here. They are citizens of the US. They know our political and legal systems and are familiar with our culture.

    I don’t know that I agree that we are chasing away manufacturing jobs (intentionally anyway). Both Democrats and Republicans have pushed for open trade and free trade deals for many, many decades now (something that stems from our history). That free flow of commerce has allowed companies to choose the cheapest place to manufacture goods. But that isn’t taxes chasing them away. It was just us allowing the market to work its magic.

  • tx2vadem

    J,

    The proposal doesn’t change the reality you spoke of. You can defer indefinitely US FIT on a foreign subsidiaries earnings if you always reinvest all of those earnings in that country. This doesn’t change at all the instance when you do repatriate the money via a dividend to the parent company in the US. But even when you do repatriate those profits, you still get to take foreign tax credits against the US tax that would be owed on those foreign earnings. You only remit the residual amount in the event local taxes are lower than the US tax rate (~35% given the size of earnings of multi-nationals). So, you don’t pay 35% on top of what you already paid in say Indian taxes as in your example.

    I don’t think this affects operational optimization decisions as you suggest. It certainly affects financing decisions and maybe international capital flows. But cheap labor in India is still cheap labor in India. And as long you don’t remit those earnings back to the parent, you can defer that residual tax forever.

  • tx2vadem

    A correction to my earlier statements, we are not unique in taxing global income. After a little research a lot of countries include this in their tax codes.

  • http://Tidewaterliberty.com Britt Howard

    I wouldn’t rule out Microsoft moving operations outside of the US out of pure spite when the last straw is weighed on that camel’s back. Between all the government investigations and regulatory tangles, Bill Gates having more money than just about everyone, leaving just because you can is always an option.

    How about instead of trying to find a way to pay for something that will cripple our economy and ration our health care, we find a better way.

    Oh, don’t forget………..lets remind Microsoft that in addition to paying for Government Healthcare that will be inferior to what they currently provide already, that they’ll be dealing with an economy about to be wrecked by Cap and Tax. Problem is they have money. Microsoft knows they have money and the Dems are looking for now and in the future for ways to pay for all their socialism. Wasn’t there a quote by Nancy Pelosi to the effect that the middle class doesn’t have any more to give, so lets go where the money is? Didn’t she want Bush Tax cuts to expire sooner rather than later?

    Gee, sooner or later some people are going to be concerned with protecting their assets.

  • http://www.littledavidobermark.blogspot.com/ LittleDavid

    tx2vadem,

    What you are saying about how many other countries tax deferred foreign income conflicts with an individual I heard discuss the issue on NPR. Most countries tax global income but my understanding is that Obama’s proposal would tax global income that is not returned to the nation.

    Now, Obama’s proposal would crack down on those who only open shell corporations offshore to shield income from taxes. Examples of this abuse of the tax code is that numerous (numbering over a thousand) corporations in one Caribbean island nation have the same postal address as their place of business. The building located at that address could not possibly house offices for that many corporations, and the address only serves as a mail drop. However in cracking down on these type of tax shields, the proposal would also catch many other corporations in their nets.

    Multinational corporations headquartered in the United States would be placed at a competitive disadvantage to those headquartered almost anywhere else.

    If the information you have found disputes this, I would ask you to please point me towards how I can further my understanding on this issue. I know J.R. does not allow links, but perhaps you can provide the terms I can start a Google search with.

  • tx2vadem

    LittleDavid,

    My correction was just to note that many countries tax global income. How they handle double taxation relief for foreign sourced income varies. And you really have to read their tax codes/guidance to figure that out. And in some cases, you have tax treaties that govern it. I skimmed over the UK’s, Japan’s, and India’s tax sites concerning this. What I cannot see is whether any allow for an indefinite deferral of taxation on income that is not repatriated like we do. You can just search the country name and corporate tax and that generally pulls up the country’s tax authority which has the rules. But I would think if they are working off the company’s financial statements as a basis (but can’t say that I know how India and Japan treat consolidation, if it’s like US GAAP then this assumption should work), they would be including income from consolidated foreign entities in the calculation of tax regardless of whether that recognized income was distributed or not. I haven’t found site that just does a direct comparison of the tax codes with respect to this. If you find something, that would be awesome!

    On my other points, just Google: “corporate foreign tax credits.” The Tax Policy Center has an explanation of how the US code currently works with respect to this. Even if this deferral were removed, you would still have foreign tax credits.