A Dastardly Tax Proposal to Damage U.S. Growth

Obama declared war on corporate tax evaders today, unveiling a plan that will make it harder for companies to hide money offshore indefinitely and, in so doing, raise an extra $103.1 billion over 10 years (according to the Administration's math, at least). (For background, check here.)

The response from corporate America was predictable. The chief economist at the U.S. Chamber of Commerce summed up the sentiment: By raising taxes on Big Business, “you limit the ability of U.S. companies to compete, you impede growth in the U.S. economy, and you cause the loss of jobs — both at the companies directly impacted and companies in their supply chains.”

No one likes higher taxes, and corporate America holds no monopoly in arguing that higher taxes hurt the country's growth prospects. But corporate America has been a particularly large beneficiary of such arguments: the Administration calculates that U.S. multinationals paid just $16 billion in taxes on $700 billion in foreign earnings in 2004, an effective tax rate of just 2.3 percent.

What corporate spokespersons are all too happy to forget in arguing against higher taxes is the extreme tax arbitrage utilized by their companies. A GAO report to Congress earlier this year found that of America's 100 largest corporations, 83 had units in tax havens like Switzerland and the Cayman Islands. This number includes such paragons of corporate excellence as AIG, which had 88 subsidiaries in tax havens, including two in Bahrain and five in the Bahamas. If anyone thinks this is because AIG has a healthy business in underwriting Bahamanian life insurance, I'll make you a great offer on a timeshare in Detroit.

The argument against taxing corporations more is that it will damage their international competitiveness, and we'll lose jobs and business to overseas firms. Color me skeptical. Of the $103.1 billion raised by cutting down on tax arbitrage, $74.5 billion will go to making a permanent tax credit for companies that invest in R&D in the U.S. That hardly sounds like a plan that will damage U.S. growth prospects.