President Obama’s campaign added a new twist to their assault on Mitt Romney yesterday, saying that his jobs plan would create 800,000 jobs overseas. This is largely a talking point, but it’s good to look at the consequences of a territorial taxation regime, which is what the campaign essentially does here.
They rely on a new paper about the consequences of territorial taxation, from Kimberly Clausing. Clausing has no brief for the current system of corporate taxation in the United States, which allows corporations to park profits overseas and offshore jobs. Then she looks at a couple different strategies to reverse that trend. One, a bipartisan proposal from Ron Wyden and Dan Coats, would place a minimum tax on foreign income from tax havens like Bermuda or the Cayman Islands. This plan would also lower the corporate tax rate while “broadening the base,” even though the US is one of the lowest-tax countries for corporations if you look at the revenue they actually generate on the corporate tax.
The plan Romney has endorsed would change the US tax system to one of territorial taxation. That means that foreign income from US multinationals would be exempt from US taxation. While this seems intuitive, it would turn every country in the world into a foreign tax haven, and encourage US companies to book profits abroad and abandon the US. As Clausing says, this is justified with a bit of legerdemain:
Advocates of a territorial system argue that because many of our trading partners have moved to a territorial system, we need to follow if our multinational corporations are to remain competitive. Yet most countries with territorial systems have hybrid versions of territoriality that are far different from the version being suggested for the United States. Those hybrid systems include tough antiabuse provisions that discourage the shifting of income and employment to low-tax havens; the result is often a higher tax on foreign income than applies in the United States.
In other words, you can move to territorial taxation with these other controls and discouragements; but that’s not the plan on offer. Instead, the plan is to turn loopholes into freeways for Mack trucks. In fact, other countries’ territorial taxation regimes typically tax profits from tax havens which offer drastically lower tax rates.
This is how Clausing arrives at the figure of 800,000 jobs created outside the US by a territorial taxation regime. This would specifically go to low-tax countries, like China, Mexico, Singapore, Taiwan and India. But because the plan would turn every country on Earth into a US tax haven, even countries not thought of as tax havens, like Canada and Germany, would benefit.
Jared Bernstein writes:
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!
And that’s what a shift to pure territoriality would likely do.
Importantly, the globalization arguments only make sense – I would argue not even then, but for the sake of argument we’ll say so – if we were in a state of low unemployment, where the jobs offshored could be replaced, and the benefits of globalization conferred would make up the difference. That’s not where we are at all right now.