Obama's Economic Berlin Wall
The White House went on a mission this week to establish an economic Berlin Wall around American business. In a spectacularly misguided policy, the Obama Administration has proposed that the US Congress force US business interests that do business overseas and hold their profits overseas to pay US income tax on those profits irregardless whether or not those profits are repatriated to the United States.The United States government enforces a particularly discriminatory tax policy known as worldwide taxation. Currently if a US business interest makes and sells a product overseas, pays the income tax in the overseas tax jurisdiction, the US government then taxes the profits of the US company. In almost every other country, territorial taxation is practiced. If a French company makes and sells a product overseas, the profits are taxed in the overseas tax jurisdiction, but when the French company repatriates those profits back to France, the company gets to keep those profits. The French government does not tax those profits again.
US politicians recognized that this is a system of double taxation and have created a policy known as "deferral". This allows a US company to hold its profits overseas and defer payment of US taxes until it repatriates those profits to the United States. When the profits are repatriated, the US entity is given a credit towards the amount paid in overseas income tax and the company pays the difference between the 35% corporate tax rate and the amount paid in overseas income tax.
The Obama Administration now wants to change this. The Administration does not like that American companies are keeping their profits offshore even though they are in full compliance with US tax law. The Administration now wants to tax American companies on their profits whether or not those profits have been repatriated.
This is a very anti-competitive proposal. Higher tax rates will cause American companies to lose market share. Foreign firms, not saddled with a commensurate tax burden, will gain in market share.
Saddling American business with costs that competitors don't have to pay will kill American jobs. American politicians scream about the offshoring of jobs. This is precisely the situation where government is forcing American business to offshore jobs. American business would be entirely justified in closing down their American business presence and establishing itself abroad as an overseas company.
It's pretty sad to see America devouring itself through the politics of greed, envy and coveteousness. Mr. Obama's foolish tax legislation has been proposed for two reasons. First, US politicians refuse to reign in their own spending and live within their own means. Second, US politicians know that they can remain in office if they can play the electorate against its own self-interest.
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