Outrageous: Runaway Taxes

When U.S. companies go into business overseas, it's Americanworkers who get stuck with the bill.

By Michael Crowley

For years now, politicians have been promising to dosomething about the flight of American jobs overseas. So why does Washingtoncontinue to reward companies that invest abroad? That's right, reward. Becauseour tax code actually encourages companies to do business in places likeMexico, China, and India-which sticks the rest of us with a higher tax bill.

"The U.S. tax code is set up so that if I am a U.S.corporation trying to decide whether to create jobs in Ohio or in Ireland, itwill point me toward Ireland," says Martin Sullivan, a contributing editorat Tax Analysts, a nonprofit organization that tracks tax policies worldwide.

Don't believe it? Here's how it works: In theory, thegovernment taxes the worldwide earnings of U.S.-based companies. But under thefederal tax code, American companies have to pay taxes only on the earnings oftheir foreign subsidiaries when they bring that money back to the States. Butthere's no rule saying those companies ever have to bring that money home. Aslong as they reinvest their foreign earnings abroad, they pay only the hostcountry's (usually lower) tax rate. That's what you'd call a big, fat loophole,and big business finds a loophole like water finds a leak.

Many companies just plow the money they make overseas backinto their foreign operations-things like factories that employ hundreds ofworkers. That means more economic growth for other countries-and less here athome. As a 2006 report by the nonpartisan Congressional Research Servicebluntly put it, this scheme is "an incentive for U.S. firms to investabroad in countries with low tax rates."

We're talking about dollar figures that will make your headspin. According to a 2006 government report, U.S. companies have nearly $500billion stashed abroad that could be taxed here at home. A recent USA Todayexamination of Securities and Exchange Commission records discovered thatGeneral Electric had $62 billion stowed overseas; Pfizer, $60 billion; andExxonMobil, $56 billion. A recent Tax Analysts study discovered that in 2004alone, U.S.-based multinationals shifted nearly $50 billion in income tocountries with lower taxes.

The problem is a tax law that was last updated during theKennedy administration. During the Cold War, the government did have a goodreason to encourage investment abroad: We wanted to extend American influenceto combat Communism. No one would write the law this way today. But an army ofcorporate lobbyists are fighting to keep things just as they are. As RobertMcIntyre of the Washington-based tax policy group Citizens for Tax Justicesays, "There's no benefit to anybody but the companies that do it."

It's hard to pinpoint just how many jobs our tax code shipsoverseas. But in an article published by Tax Analysts, Martin Sullivan foundthat U.S.-based multinational companies are creating about one new job overseasfor every one they slash here. The issue isn't just jobs, though. Every dollarof taxes that these companies avoid shifts the burden further onto workingfolks. With loopholes like this, is it any wonder that the share of overalltaxes paid by corporations is less than half what it was when Eisenhower waspresident? And this at a time when CEOs get rich while the wages of averageworkers stagnate and everyone gets socked with higher health care and energycosts.

So when you think about it, the really loony part is thatAmerican workers are in effect subsidizing-through taxes-their own job losses.What's more maddening is that this isn't a secret. It blows up in the newsevery couple of years during election season, with politicians vowing to closethis loophole in an instant. But once the votes are cast, the talk inWashington dies down.

When it comes to overseas earnings, Congress needs to stepin and make companies pony up. It could change the law to tax overseas earningsat the same rate as domestic income. That would mean all-out war with powerfullobbyists, who also happen to donate generously to both parties. (Translation:It's not very likely.) Another idea is to lower tax rates across the board forall corporations, making America more competitive abroad and rewardingcompanies investing here at home-while letting the government reap gains fromless tax avoidance. That's not protectionism or big government. It's justapplying the law with common sense and fairness.

Defenders of the current situation say that changing theforeign-income law could stunt the economy and drive businesses to relocatemore, if not all, of their operations to other countries. But not many AmericanCEOs want to leave their home country altogether-they would rather avoid theunpredictable social and legal factors in foreign countries. Plus, they likeliving here in the United States. Another claim is that when American companiesdo well overseas, their profits help them flourish back home, too, creatingmore jobs everywhere. If people really believe that, then why not just be openabout it and create tax credits for investment overseas?

Let's be realistic: Changing the tax code can't stop jobsfrom going overseas. Profit-minded companies will always seek out places wherelabor is cheaper, almost regardless of the tax consequences. The huge money aCEO can save by relocating a call center from Indiana to India will oftenoutweigh any other factor. But even though we can't do anything about wagesabroad, we can stop Washington from rewarding companies for investingoverseas-at the expense of American workers.