Double Irish with a Dutch sandwich with a vengeance

by pdxblake

One of the big conservative talking points is that businesses are hoarding their billions overseas instead of creating jobs because it is unfair to tax overseas profits, and if only the US allowed them to not pay US taxes on foreign earnings, they would create so many new jobs.  Nevermind that it is more likely that allowing businesses another “repatriation tax holiday” like the Bush Administration did in 2004 did not lead to a big surge in hiring, and instead just gave businesses the extra incentive to continue to hide their billions overseas until the next time they can bring it back for cheap, and to increase their use of offshore tax havens where they can shift profits (even those actually generated in the US, as the NY Times described in a detailed article about Apple’s Double Irish with a Dutch sandwich)

However, one of Mitt Romney’s policies is to end corporate taxation on foreign income, or translating to wonk, move to a “territorial tax system” where the US only taxes income earned in the US.  He claims this would put the US tax system more in line with other countries that use the territorial system.  However, it is more likely to lead to additional offshoring of jobs, based on the research of Reed College economics professor Kim Clausing who estimates: “In 2008, U.S. multinational firms employed 10 million workers in affiliated firms abroad. Under a pure territorial tax system, the tax incentive to locate jobs in low-tax countries would increase significantly, and I calculate that this would increase employment in low-tax countries by about 800,000 jobs” (emphasis added).  This represents an increase of 8% in foreign employment (who would most likely be replacing US-based workers). The Romney plan also excludes (as far as we can tell) the main feature of most territorial tax systems: taxation of some foreign earnings from low-tax countries to reduce abuse of the system through income shifting.

The argument about whether outsourcing is good or bad will continue and I’m going to skip the argument for now just agree with Jared Bernstein at the non-partisan Center on Budget and Policy Priorities (CBPP) who noted in a blog post today about territorial tax systems: “Here’s my take on the offshoring of jobs: it happens…it’s part of globalization.  But the last thing you’d want to do from a policy perspective is incentivize more of it!” (emphasis in original).

Again, as with most of the policies emanating from the Republican Party, this is a policy that can be turned into a (misleading) bumper sticker to sell it as helping create jobs in the US, but in the end all it will do is benefit mostly large corporations and incentivize them to move jobs overseas.  It will also do more harm to the budget deficit (which Republicans only seem to care about when there is a Democratic president in charge).  Currently, income shifting by corporations costs the US Treasury $90 billion a year according to Clausing and it is hard to see a policy that incentivizes more shifting of jobs and profits to low-tax countries leading to higher tax receipts in the US.