Josten's point aside, the big news here is: Kerry's admitting tax cuts work.

Will the left ever get over it?
This is what they've been calling 'corporate welfare' for years. And the 'one time' bit should have folks very concerned indeed; Is busienss going to alter their plans for moving, based on only one year of cuts from a man who gives them grudingly?

Wrong for America.

"’There is a broader point he completely misses: There are companies that open up overseas’ for reasons other than tax avoidance, he said.”

John Kerry’s economic policies would push us into a deep recession. Where is Brad DeLong when you truly need him? Does he have anything to say on this matter? Where are the other so-called sensible Democrat economists? Howard Dean set the agenda for today’s Democrat Party. Kerry is simply pandering to his base. As I’ve said many times before---protectionism is now a Democrat Party dogma. Heretics will be severely punished. The middle of the road Democrats no longer have a home.

Bithead writes: " Kerry's admitting tax cuts work."

Uh, no. He's saying a current tax loophole creates perverse incentives for companies to invest overseas to save on US taxes.

Hell, even the Wall Street Journal recently demonstrated, with a concurring comment from Kevin Hassett of the AEI, that the tax exemption on unrepatriated earnings encourages the movement of jobs and investment offshore.

http://online.wsj.com/article_print/0,,SB107904148013253023,00.html

"Turns out Mr. Kerry is right. Even more compellingly, a couple of conservative economists I called agree with him. "The U.S. tax code definitely provides a strong incentive for sending jobs overseas," says Kevin Hassett, an economist at the conservative American Enterprise Institute."

1) Actually, the way encourage job growth is to (a) Impose tax penalties(e.g, 10%) on income earned abroad and use revenue to cushion displacement of US workers
(b) raise marginal income tax rates to 60% for high income brackets but allow earnings to be taxed as capital gains of 20% when invested in job creation businesses
(c) Enforce (a) and (b) by sending a few hundred Wall Street advisors and investors to prison when they try to avoid taxes with tax shelters in the the Caymens,etc. If they don't get the message , send a few hundred more. PBS had a documentary a few weeks ago above the prevasive extent of abusive tax shelters --and made clear that such practices continue because of tolerance by the (Republican dominated) Congress.

Oh, I forgot: You also need to print money to stimulate an inflation rate of 6-7% --with no adjustment to taxes for inflation gains --so that the rich suffer heavy penalties if they park it under the mattress.

Along with significant jail terms for tax evasion.

To those who cry "oppression", let me note that the US plutocrats and their CEOs have been "oppressing" American workers for the past two decades --rewarding us for our tolerance and good will by screwing us every why they can. If Americans understood half of what the Republicans have done to them, they wouldn't vote them out of office --they would throw them up against a wall and blow their brains out with shotguns.

how much will it help heinz?

Don-- so when rich people try to move out of the country rather than just storing their assets offshore, do we also throw them in jail? How do we tell what is a "job creation business?" Is that meaningless blather, or do we raise taxes on investments if a business fires someone? Wouldn't that give us the same reluctant-to-fire (and thus reluctant-to-hire) culture that's created the high unemployment in Germany and France?

There are, of course, a hundred and one ways to hide income earned abroad through subsidiary arms, and having subsidiary arms charge one another for services. The easiest way of all is simply to move corporate headquarters out of the US.

Businesses need to do work both here and abroad for a variety of reasons. Imposing special penalties on US businesses for doing business abroad is simply more likely to make them not US businesses in the long run. Removing deferral means that a company is much better off just being foreign owned rather than US owned, if they have to do business abroad. (Why pay twice?)

w writes: "how much will it help heinz?"

It won't. They'll probably start owing more taxes, but you'd have to check out their SEC filings and determine how much they're declaring as "unrepatriated earnings".

Prof. Drezner, I'm curious as to your opinion on the matter ?

“To those who cry "oppression", let me note that the US plutocrats and their CEOs have been "oppressing" American workers for the past two decades --rewarding us for our tolerance and good will by screwing us every why they can.”

Don Williams is really off his rocker. Still, he speaks for the mainstream of Democrat activists. He is not an exception to the rule--Mr. Williams represents the majority. The Democrat Party is advancing economic polices which will severely damage our economy. Once again, where are Robert Rubin and Brad DeLong? Oh well, I guess it behooves me to visit the latter gentleman’s blog and see what is happening.

I have just visited Brad DeLong's blog.

http://www.j-bradford-delong.net/movable_type/

Gosh, he has nothing yet about John Kerry's tax proposal. What is he waiting for? Could it be that the cat has his tongue?

The Washington Post gets one major fact about deferral wrong. It's offered to US companies that do business in higher-taxed or lower-taxed companies. The short version is that it allows foreign corporate taxes paid by subsidiaries to be deducted from US taxes. Note that the company always pays at least the US rate of 35% on earnings, even in low-tax countries, but in high-tax countries the US gets essentially no tax revenue. Some backround. There are a variety of methods that the IRS already employs (and has since at least the 1960s, with some minor changes) to attempt to prevent companies from improperly hiding their incoming in foreign countries through multiple subsidiaries.

It does enable US businesses to set up foreign subsidiaries. Keep in mind that many of these subsidiaries are necessary to doing business abroad-- US service companies need foreign branch offices, if only to sell to residents of foreign countries. Without these laws, a US company would be taxed twice on its foreign profits.

So, yes, repeal would make it a lot harder for US companies to expand abroad. This is hardly an unalloyed good thing. US companies would be much less able to capture parts of foreign service markets. Instead, non-US companies would do much better, by avoiding double taxation. (And US companies would spin off their foreign arms.)

So this proposal seems designed to discourage all multinational trade by US companies. It will bring some jobs home, but it will also prevent US companies from exporting goods and especially services abroad. It's a tax for doing business abroad, and a tax cut for doing business at home. The end result is very similar to protectionism.

Either/or arguments don't work when applied to the economy. In some situations tax cuts are good, in some situations they are bad. You cannot evaluate "tax cuts" you have to evaluate specific tax cuts. And even within that you will have a mix of results. Some will be good, some will be bad, and you have to figure out what you value to determine if the net effect is positive.

Let's also be clear that Kerry's policy is just saying that tax policy should not be structured to encourage jobs to move overseas. Tax policy is a strong incentive for all kinds of action. It is structured to encourage home ownership, to encourage having children, to encourage starting a business. All of these things are good, and it is right that tax policy gives incentives for these activities. Removing a tax break for moving jobs overseas is just saying that we would rather not encourage this activity with tax policy. If it still makes sense for a company to move jobs overseas that is fine. No one is stopping them, the policy change is just saying we are not going to provide an incentive for doing this. I encourage people who see no good in John Kerry to tie themselves in knots trying to explain why this is not a good policy change.

Very much appreciated, Rich. I can move on now.

“Let's also be clear that Kerry's policy is just saying that tax policy should not be structured to encourage jobs to move overseas.”

Baloney. Read John Thacker’s post. It’s very well done. Our tax laws merely try to prevent the offshore company from being double-whammied on taxes. We remove these tax breaks and it virtually becomes too expensive to do business outside of the country. It will also result in a nasty trade war---and further increase world poverty.

According to the WSJ article, this tax cut would be funded by eliminating the credit for foreign income taxes available to US companies operating in other countries. But only sometimes. If the US-owned plant exists to serve a foreign market, the credit would still be available.

This could work in some situations...a ketchup plant built in Europe probably only serves European customers. But in other cases, it doesn't. What about a US-owned auto parts plant located in Germany and selling 70% of its output to German companies and 30% to US companies? I would foresee hideous cost-allocation issues, and endless litigation on such matters...

While my post follows John Thacker's it was written before I read his post. At some point I will look into the real nitty gritty to see if what he says is true. But for now, don't read what I wrote as an argument against his post.

John Thacker:

I suggest you read the Wall Street Journal column at
http://online.wsj.com/article_print/0,,SB107904148013253023,00.html

It doesn't support your description of how unrepatriated profits are treated ("Note that the company always pays at least the US rate of 35% on earnings")

For example:

"Backing up a step, here's how it works before the loophole: A company earns $100 million abroad in Lowtaxistan where the corporate tax rate is 20%. The foreign subsidiary pays that money to the U.S. parent. The parent then pays $35 million to the U.S. government and takes a credit for the 20% (or $20 million) payment to the Lowtaxistan government. So the net to the U.S. Internal Revenue Service is $15 million.

But here's how it works with the loophole: The U.S. subsidiary simply keeps the money offshore and certifies to its accountants that the money is invested overseas. It never remits the money to the parent and so never pays the $15 million extra to Uncle Sam."

OK, Jon, so his proposal apparently isn't about completely eliminating deferral. That's the way that I read the Washington Post article ("For the first time, he will target a popular tax incentive, known as 'deferral,'..."), but I was wrong, which makes sense. Completely repealing deferral would be extremely stupid. My remarks apply to the utility of deferral in general, which is a good thing.

So it seems that what is being proposed is altering the 1960s rules to try to close loopholes and prevent income from being declared foreign in origin. That's a much more complicated thing to read the effects of, and the effect is probably much, much smaller.

The same general objections apply, though. It amounts to a tax raise on companies doing business offshore. Unless it's done very carefully, (and even then) it's still likely to encourage businesses to simply divest their foreign assets, not expand abroad, or relocate their headquarters. So lots of study from experts is needed.

Yes, current tax law has aspects which encourage US firms to expand and invest abroad. Yes, it's very easy to change the law to no longer encourage that. It's much more difficult to predict whether companies will respond by bringing more profits home, or by no longer being US firms.

(In the long run, too, US company profits go either back into the company, or go to shareholders.)

Reducing the corporate tax rate, even by a little bit, is actually probably the most effective way to reduce this practice. Slightly less offshoring and tax evasion recoups some amount of the tax cut, though of course it's hard to say how much.

I am an outsourced employee. The corporation I work for is based in France. They currently employ about 3,000 people in the U.S. They have manufacturing distribution, plus sales and marketing offices in 35 States and 45 countries.

My situation is hardly unique. The world is far more economically intertwined than it may ever be politically and people need to adjust to that fact.

Plutocrat? I wonder, does Don Williams fantasize about being a writer for Granma, or is it Der Stuermer he prefers? Either way, his suggestion concerning the benefits that the working class would derive from murdering members of the Republican Party could've come straight out of either Castro's Cuba or Hitler's Germany...but I hope that most Americans would find it as revolting a suggestion as I do.

Jon-- The short, soundbite objection:

"If these companies have a huge incentive to invest in their offshore subsidiaries because of this law, then they would have just as large an incentive to spin off their foreign subsidiaries or relocate their headquarters to gain the same tax treatment if the law were changed."

So it is complicated. Hard to know without further study.

The lower corporate tax rate would help with offshoring, though.

OK, so I went to the Kerry site and read more carefully. At one point he says he wants to completely eliminate deferral and the entire Schedule F. (Bad Idea) Then later he says that he wants to have deferral for companies which are investing in factories and services that serve foreign markets. (This is an obvious Good Thing and the reason that we have deferral in the first place.)

Of course, that's the intended purpose of Schedule F in the first place, and has been since 1963. So perhaps this large sweeping-sounding proposal is really a small attempt to eliminate loopholes or change Schedule F, combined with a small corporate tax rate cut.

I suppose it's politics, but he has plenty of soundbites and large type paragraphs that make it sound like he wants to completely eliminate deferral, and then in the fine print it sounds more like small changes around the edges on deferral.

Here's some information, from the WSJ column linked above, about the amount of nonrepatriated earnings:

What you'll find [in SEC 10K filings] is something like this from Pfizer.

"As of December 31, 2003, we have not made a U.S. tax provision on approximately $38 billion of unremitted earnings of our international subsidiaries. These earnings are expected, for the most part, to be reinvested overseas. It is not practical to compute the estimated deferred tax liability on these earnings."
...
Note that the $38 billion total of unremitted earnings is cumulative over the years. In 2002, Pfizer had $29 billion, so the increase was $9 billion in the past year, helping the company substantially shave its tax bill.
...
What we know is that the amount of unrepatriated foreign earnings is growing substantially. The non-partisan Congressional Research Service in a report last year said it had increased to $639 billion in 2002 from $403 billion in 1999.

(I probably should mention that my full-time employer, General Electric, is among the leaders with $21 billion of unrepatriated earnings. That helped the company achieve an overall corporate tax rate of 21.7%.)

I agree that it's a very tricky issue.

So if I understand Dan Drezner's update right, Kerry is using a bit of populist overhyping to sell a reasonable (Dan uses the word "sane") and marginal change in the tax code. Sounds good to me.

ch2-- It's a reasonable change about which people can disagree. Much better than the ridiculous "Benedict Arnold CEOs" claim, although certainly overhyped. Like most changes of this type, it won't exactly thrill our foreign trading partners and allies, though.

It's not nearly the massive change that it's being presented as, from what I can tell now.

I just found this on National Review's Corner:

"BEWARE LIBERALS BEARING TAX-CUT GIFTS [Don Luskin ]
Kerry chimes in today with his economic plan. The central features are a lower corporate tax rate and the removal of tax breaks on companies who operate overseas. The so-called loophole at stake here is, itself, a form of “reform”-- which Kerry now threatens to repeal. Unlike almost any other major nation, the U.S. now taxes U.S.-based companies on their world income. Letting companies thus afflicted defer taxes on earnings overseas has been a way of lightening that unfair burden. Now Kerry proposes to put that burden back. The supposed offset? A lowering of the overall corporate tax rate. That means an arbitrary windfall to anyone who hasn’t been smart enough to defer all these years--and an asymmetrical punishment to those who were smart enough. In fact, those smart people will probably just solve the problem by leaving the U.S. entirely and setting up shop in a country that doesn’t burden its productive corporations as heavily as the United States.
Posted at 11:33 AM"

Does Donald Luskin's view seem sensible?

John Thacker,
Like most changes of this type, it won't exactly thrill our foreign trading partners and allies, though.

What's the specific objection(s) our trading partners would have ?

Opps, it turns out that I missed Dan Drezner's earlier Corner update. Sorry about that. Nonetheless, is Donald Luskin's criticism on target?

Okay does anybody believe that this proposed change in the tax code will directly lead to the creation of an additional ten million jobs in the United States that would be created otherwise?

Thorley writes: "Okay does anybody believe that this proposed change in the tax code will directly lead to the creation of an additional ten million jobs in the United States that would be created otherwise?"

Kerry's proposals also include a 2 year period in which businesses will get a tax credit for the payroll taxes of new employees.

And there would be a one year window where repatriated profits would be taxed at only 10%. That could be a significant incentive to invest in the US during that year.

Will they create 10 million jobs in 4 years? I dunno. But they're at least drawn up with an eye toward specifically encouraging job growth. Bush's tax cuts have just been pissing in the wind.

“Kerry's proposals also include a 2 year period in which businesses will get a tax credit for the payroll taxes of new employees.”

This could be very damaging to the economy. It is virtually certain that unnecessary employees will added simply to get the tax breaks. Long term sustainable economic growth depends on lean and mean management practices.

“But they're at least drawn up with an eye toward specifically encouraging job growth”
“Kerry's proposals also include a 2 year period in which businesses will get a tax credit for the payroll taxes of new employees.”

This could be very damaging to the economy. It is virtually certain that unnecessary employees will added simply to get the tax breaks. Long term sustainable economic growth depends on lean and mean management practices.

“And there would be a one year window where repatriated profits would be taxed at only 10%. That could be a significant incentive to invest in the US during that year.”

This is simply the start of a trade war. The world economy will severely damaged if every country does the same thing. It’s one thing to make sure that our companies are not being double-whammied by taxes. But we cannot artificially encourage them not to export jobs.

“But they're at least drawn up with an eye toward specifically encouraging job growth”

Do you really want job growth at any price? In that case, we should mandate that all construction workers be provided tea spoons instead of mechanical digging equipment. That will definitely increase the additional demand for new hires!

Once again, it needs to be pointed out that the lying liberal media did not criticize the Clinton administration for reporting similar unemployment figures. The Bush administration is being singled out for figures which normally are considered better than average. What should we be looking at? The important figures are the improving productivity rates and overall economic growth.

The previous post contained a slight error. This is what often happens when one hasn’t had their first cup of coffee in the morning. Lets try it again:

“Kerry's proposals also include a 2 year period in which businesses will get a tax credit for the payroll taxes of new employees.”

This could be very damaging to the economy. It is virtually certain that unnecessary employees will be added simply to get the tax breaks. Long term sustainable economic growth depends on lean and mean management practices.

“And there would be a one year window where repatriated profits would be taxed at only 10%. That could be a significant incentive to invest in the US during that year.”

This is simply the start of a trade war. The world economy will severely damaged if every country does the same thing. It’s one thing to make sure that our companies are not being double-whammied by taxes. But we cannot artificially encourage them not to export jobs.

“But they're at least drawn up with an eye toward specifically encouraging job growth”

Do you really want job growth at any price? In that case, we should mandate that all construction workers be provided tea spoons instead of mechanical digging equipment. That will definitely increase the additional demand for new hires!

“I dunno. But they're at least drawn up with an eye toward specifically encouraging job growth. Bush's tax cuts have just been pissing in the wind.”

Once again, it needs to be pointed out that the lying liberal media did not criticize the Clinton administration for reporting similar unemployment figures. The Bush administration is being singled out for figures which normally are considered better than average. What should we be looking at? The important figures are the improving productivity rates and overall economic growth.

About the 10 million jobs in 4 years:

Roger Altman was on the Brit Hume show on Fox News last evening (Jim Angle sitting in for Hume).

If I understood him correctly, Altman said that 7 million jobs are expected to be added just under normal conditions with the current consensus of economic growth. (In other words, nothing to do with Kerry.)

Altman said that Kerry's aggressive plans for the working man (etc., etc.) would push that number to 10 million.

One might say (cynically) that they rounded 7 million up to 10 million, a nicer sound bite.

"If I understood him correctly, Altman said that 7 million jobs are expected to be added just under normal conditions with the current consensus of economic growth. (In other words, nothing to do with Kerry.)"

Of course, what we've been seeing has been anything *but* normal conditions. Hiring hasn't been keeping up with economic growth over several years, even after the recession ended.

Just because economists are predicting a certain level of GDP growth doesn't mean that will automatically translate into job gains.

One thing that Kerry's proposal won't do anything about is healthcare costs. If healthcare is the real culprit in suppressing hiring, then this proposal might not help much at all, and we might not get even 7 million jobs

1) Isn't this what we were hearing three years ago -- give a massive $Trillion+ tax cuts to the richest people in the US and we will have pie in the sky, by and by.

2) In the opinion, the deceit of conservative pundits -- and of whoring economists -- knows no bounds.

3) Let's remember that the crappy Bush economy is being sustained by enormous debt and expenditures -- which are NOT going into productive investments. Unemployment would be even worse if not for huge public works programs based on shoveling hundreds of $Billions to favored defense contractors who donate to the Republicans. But Bush's enormously wasteful spending cannot be sustained -- as I've noted, he is already forecasting a federal debt for 2008 that is $3.8 TRILLION higher than what he promised only three years ago. He has dumped $70,000 in NEW debt onto middle class households -- have many of those households have increased their net worth by $70,000 during this --the Second Bush Recession.

4) Plus , let's remember that the global empire Bush is building with $400 billion/year in defense expenditures is NOT earning a profit --instead,it is running at a loss -- roughly $400 billion/year trade DEFICIT. From the viewpoint of national interest, his policies are idiotic --they only make sense when one realizes that the profits are going to Bush's campaign donors and the massive costs are being dumped on US citizens.

5) This is obviously to anyone who takes an honest look at the situation --which makes me wonder why the Bush apologists here seem to avert their eyes from these facts.

Correction to typo in paragraph 2 of the above post: "2) In the opinion," should have read
"2) In my opinion,"

Hmm.

All things considered I'd be surprised if this economy produces 700,000 private sectors jobs in this entire year.

Hmm, If the government would get the hell out of our way we'd do better!

Don Williams wrote:

Let's remember that the crappy Bush economy is being sustained by enormous debt and expenditures -- which are NOT going into productive investments. Unemployment would be even worse if not for huge public works programs based on shoveling hundreds of $Billions to favored defense contractors who donate to the Republicans.

Really, how many “hundreds of $Billions” is being shoveled to “favored defense contractors who donate to the Republicans”?

But Bush's enormously wasteful spending cannot be sustained

How much of that spending did John Kerry vote for? Did he on the aggregate vote for more or less spending than Bush signed into law?

Some of the lowest families who had heard tales of marketable Sir Wade Jermyns present buckle-on wife reposed that her adept blood must be showing itself