The Volokh Conspiracy - Would Worldwide Taxation of US Corporations Help or Hurt?

On CNBC, commentators today were discussing the proposal to tax the worldwide income of American corporations, even when that income is not brought home to the US. I haven't seen much discussion in the blogs on this issue, but there has been some.

At present, we have a set of tax treaties with many countries that, among other things, prevent those countries from treating foreign subsidiaries of American corporations less favorably than they treat their domestic corporations. Thus, Switzerland should not tax Swiss subsidiaries of American corporations at higher rates than Swiss corporations.

After getting other governments not to discriminate against US corporations, we are proposing to do just that to our own corporations. Will a US-owned Swiss subsidiary be able to compete on price with a Swiss company that pays lower taxes on its corporate income? Obviously, the US-owned subsidiary will be at a disadvantage if it must pay higher taxes than its competitor.

So in the real world, what are the likely responses?

1. First, as noted, US corporations will be weakened in competition with foreign corporations in their non-US operations.

2. Second, even in their US operations, US corporations will be weakened in competition with foreign corporations because those foreign corporations can use synergies from cooperating with their foreign entities, operations that are tax-advantaged in favor of foreign corporations (see 1 above).

3. Third, some US corporations will sell otherwise profitable foreign operations simply because of unequal tax treatments; indeed, the more profitable the foreign operation, the more likely it will be sold. If one owner can make more profit than another owner, the less profitable owner should sell it to the more profitable owner. This weakens US corporations economically and reduces diversification.

4. Fourth, true multi-nationals will simply change their home from the US to another country. To persuade the IRS that they are really a Canadian or Swiss company, they would have to move their higher corporate staff out of the US. If that isn't enough, they might have to cut jobs in the US and move some of their lower US operations elsewhere (or simply sell some of their US divisions).

5. Last, some US corporations will do what the proposal intends to happen: they will move jobs back from low tax foreign jurisdictions because they are no longer effectively low tax jurisdictions.

Overall, it is possible that the intended effect of taxing the worldwide profits of US corporations (#5 above) will turn out to overcome the other negative effects (#1-4 above). But I personally am skeptical that a net good can come from putting US corporations at a competitive disadvantage.

Effects 1 and 4 would seem to be especially strong. If a true multi-national can avoid the worldwide tax by simply moving its headquarters, cutting back its US operations, and downsizing its American workforce — few profit-maximizing multi-nationals would fail to do this. If worldwide taxation passes, I would expect net job losses in the US and many fewer major incorporations in the US in future years. One doesn't create wealth or jobs by crippling American corporations.

UPDATE: This evening on CNBC, Greg Valliere, who during the campaign last year was a very strong supporter of President Obama, made some of the same arguments that I had made earlier on Wednesday.

	[Jim Lindgren, April 22, 2009 at 2:17pm] Trackbacks Would Worldwide Taxation of US Corporations Help or Hurt? On CNBC, commentators today were discussing the proposal to tax the worldwide income of American corporations, even when that income is not brought home to the US. I haven't seen much discussion in the blogs on this issue, but there has been some. At present, we have a set of tax treaties with many countries that, among other things, prevent those countries from treating foreign subsidiaries of American corporations less favorably than they treat their domestic corporations. Thus, Switzerland should not tax Swiss subsidiaries of American corporations at higher rates than Swiss corporations. After getting other governments not to discriminate against US corporations, we are proposing to do just that to our own corporations. Will a US-owned Swiss subsidiary be able to compete on price with a Swiss company that pays lower taxes on its corporate income? Obviously, the US-owned subsidiary will be at a disadvantage if it must pay higher taxes than its competitor. So in the real world, what are the likely responses? 1. First, as noted, US corporations will be weakened in competition with foreign corporations in their non-US operations. 2. Second, even in their US operations, US corporations will be weakened in competition with foreign corporations because those foreign corporations can use synergies from cooperating with their foreign entities, operations that are tax-advantaged in favor of foreign corporations (see 1 above). 3. Third, some US corporations will sell otherwise profitable foreign operations simply because of unequal tax treatments; indeed, the more profitable the foreign operation, the more likely it will be sold. If one owner can make more profit than another owner, the less profitable owner should sell it to the more profitable owner. This weakens US corporations economically and reduces diversification. 4. Fourth, true multi-nationals will simply change their home from the US to another country. To persuade the IRS that they are really a Canadian or Swiss company, they would have to move their higher corporate staff out of the US. If that isn't enough, they might have to cut jobs in the US and move some of their lower US operations elsewhere (or simply sell some of their US divisions). 5. Last, some US corporations will do what the proposal intends to happen: they will move jobs back from low tax foreign jurisdictions because they are no longer effectively low tax jurisdictions. Overall, it is possible that the intended effect of taxing the worldwide profits of US corporations (#5 above) will turn out to overcome the other negative effects (#1-4 above). But I personally am skeptical that a net good can come from putting US corporations at a competitive disadvantage. Effects 1 and 4 would seem to be especially strong. If a true multi-national can avoid the worldwide tax by simply moving its headquarters, cutting back its US operations, and downsizing its American workforce — few profit-maximizing multi-nationals would fail to do this. If worldwide taxation passes, I would expect net job losses in the US and many fewer major incorporations in the US in future years. One doesn't create wealth or jobs by crippling American corporations. UPDATE: This evening on CNBC, Greg Valliere, who during the campaign last year was a very strong supporter of President Obama, made some of the same arguments that I had made earlier on Wednesday.