Populism, not tax reform

President Obama roiled the business community Monday by proposing to hike taxes on income generated outside the United States. The changes, which supposedly would close loopholes and remove incentives to export jobs and investment, would bring an estimated $210 billion to the Treasury over the next decade. We’re all for closing loopholes and ending tax shelters that enable the wealthy to hide income. But we’re not convinced that changing tax law can stop corporations from steering jobs and capital to countries with the lowest costs.

The smallest piece of the package, and the easiest to support, is devoted to overseas tax havens used by wealthy individuals. The administration aims to crack down on individuals who conceal income in foreign shelters and the companies that assist them. Obama also wants to eliminate a technique that many multinational businesses use to shift profits from operations in high-tax jurisdictions to those in low-tax ones. We support efforts to prevent companies from playing shell games overseas, although the administration’s proposal may help foreign treasuries more than the IRS.

The most troubling pieces of the package are the ones aimed at “removing tax incentives for shifting jobs overseas.” In particular, Obama wants to reduce a tax break for companies that invest in foreign subsidiaries but don’t bring the profits back to be taxed at the (presumably higher) U.S. rate. The underlying assumption is that foreign investments hurt American workers and should be discouraged by the tax code. But there’s growing evidence that U.S. companies’ foreign investments lead to more investment at home too, as they expand the research and development and administrative work at their headquarters to support their global expansion.

All of the other major industrialized nations have recognized the domestic benefits that multinationals can bring, and they no longer attempt (or have agreed to stop trying) to tax income that their companies earn outside their borders. Washington has to recognize that multinational companies move jobs and factories to lower-cost countries for many reasons and that making its tax code more punitive to foreign investment won’t reverse that process. Instead, it’s more likely to drive more of those corporations out of the U.S. or into the arms of foreign suitors. There are better ways to encourage multinationals to invest here and to reduce the distortions caused by unequal global tax rates -- for example, by broadening the corporate tax base and reducing rates so they’re more competitive internationally, or by improving U.S. workers’ skills. Obama’s proposal, however, is more about populism than effective tax reform.