The Obama administration plans to tax US-based corporations for revenue not originated from the US as part of effort to create more jobs in the US.[1] This will help neither the US economy nor the world economy to recover.
There are of course legitimate concerns with respect to tax havens as money laundering tend to happen there more often than not compared to elsewhere. But Obama administration’s proposed action will punish corporations for operating in countries with low taxes as well. The administration thinks that by doing this, those corporations will relocate its foreign operations to the United States if they are faced with the possibility of being taxed for operating abroad.
Indeed, if passed by the US Congress, the proposal may force corporations to reduce or abandon its operations outside of the US, unless they are willing to pay those taxes. Under a scenario where these corporations do relocated into the US, the corporations will suffer higher operations cost due to prevailing environment in the US, compared to places like China or India. It is worth noting that these corporations operate parts of their business out of the US to take advantage of low cost environment, especially if industries which those corporations are in are labor-intensive.
With higher production cost, higher prices will have to be charged and consequently, less will be sold.
If the proposal goes through, it will not only punish those corporations. It will also punish low-tax countries. Worse, such tax is likely to hurt trade volume in times when many countries including Malaysia are heavily reliant on trade to recover.
This of course will only happen if the tax actually convince these US corporations — in reality, multinational corporations — to relocate into the US. Given lower operations cost abroad, the other possibility is that these corporations may actually relocate more of its businesses abroad, avoiding being labeled as US corporations to avoid the tax altogether. This will be bad for the US economy.
So, the possibilities here are: one, the US bringing the world down together with it; two, the US bringing itself down. Either way, the US will lose out. The third and better possibility, of course, is for the US to not impose that tax.
The proposed move should not be too surprising to too many people. The Democrats since at least 2004 — the days of John Kerry and John Edwards — have wanted to somehow punish firms that they accuse as shipping American jobs abroad, either through outsourcing or offshoring. That thinking is protectionist and the Obama administration’s proposal should be seen as a follow-up to that protectionist tendency that Democrats are known for.
[1] — May 4 (Bloomberg) — President Barack Obama proposed raising about $190 billion over the next decade by outlawing three offshore tax-avoidance techniques used by U.S. companies such as Caterpillar Inc. and Procter & Gamble Co.
Obama’s plan also would make it riskier for Americans to stash money in tax-havens. [Obama Seeks End of Corporate Tax Break to Raise $190 Billion. Ryan J. Donmoyer. Bloomberg. May 4 2009]