[Congressional Record Volume 156, Number 131 (Monday, September 27, 2010)]
[Senate]
[Pages S7457-S7459]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ENDING OFFSHORING ACT
Mr. KYL. I wish to talk about the so-called Ending Offshoring Act, a
bill that the Wall Street Journal suggested this morning should be
called ``The Send Jobs Overseas Act.''
I ask unanimous consent to have that article printed at the
conclusion of my remarks.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
(See exhibit 1.)
Mr. KYL. Mr. President, this bill provides a temporary payroll tax
holiday for multinational U.S. employers who hire a new U.S. worker.
But not just any worker. To be eligible, the business must prove that
the employee is replacing an employee who had been performing a similar
job abroad. The bill, which is not fully offset, proposes to partially
pay for this tax holiday for multinational corporations with new tax
hikes on multinational corporations--tax hikes that could undermine job
creation in America.
How would the tax increases be applied? The bill would disallow tax
deductions associated with expanding operations overseas and would
limit tax deferral of income U.S. multinational companies earn abroad
by selling products in the United States.
Currently, when a foreign subsidiary of a U.S. parent company earns
such income, it is not taxed by the United States until it is sent back
to the U.S. parent company. Even though most foreign countries only tax
income earned within their borders, the U.S. taxes income earned
anywhere in the world by U.S. citizens and companies. The deferral
policy aims to keep U.S. companies competitive with their foreign
counterparts, since we also have the second highest corporate tax rate
in the world. So deferral is not a ``tax benefit,'' as some of the
bill's proponents claim.
This bill wrongly assumes that all foreign expansion stems from
``greed'' and that foreign expansion only hurts American workers. I
will explain why that's simply not the case and why this bill could, in
fact, hinder job creation in America and actually send American jobs
overseas permanently.
The first point I want to illustrate is how limiting tax deferral
could hurt American jobs. Limiting deferral would subject U.S.
multinational companies to higher taxes, cutting into their profits and
giving foreign competitors a huge advantage in the global marketplace.
We have to keep in mind: American companies with overseas operations
support and create U.S. jobs.
A new paper from the McKinsey Global Institute shows that America's
multinational companies make huge contributions to our economy: They
account for 19 percent of all private-sector jobs in the United States,
25 percent of all private wages, 48 percent of total export goods, and
74 percent of nonpublic research and development spending.
[[Page S7458]]
In fact, Johnson & Johnson estimates that about one in five U.S.
employees hold jobs that support their international operations.
Let me provide an example of how foreign expansion can create jobs
here at home:
A few years ago, PepsiCo embarked on an aggressive expansion program
in Eastern Europe, largely by buying up existing bottlers and snack
chip producers, upgrading plants and equipment, and improving
distribution while increasing their marketing efforts in these
countries, achieving large gains in sales as a result.
As a result of this expansion, PepsiCo's employment abroad increased,
but that did not cost any Americans their jobs. Pepsi merely took over
existing plants and their workers.
In fact, PepsiCo's foreign expansion created jobs here in the United
States. To support their overseas operations, the company needed to
expand their logistics, marketing, and other support operations, all
well-paying jobs at their U.S. headquarters. As a result, expanding
operations abroad increased employment here in the United States.
The advisers for the McKinsey report provided the jobs statistics
that show the correlation between companies' expansion abroad and
employment here at home: From 1988 to 2007, employment in foreign
affiliates rose to 10 million from 4.8 million. During that same
period, employment in U.S. parent companies rose to 22 million from
17.7 million. The reason is, as the Pepsi example shows, that much of
the expansion abroad by U.S. multinationals has complemented, rather
than replaced, U.S. operations.
In 2008, a Washington Post editorial highlighted a study that made
this same point. The study looked at U.S. manufacturers that expanded
abroad between 1982 and 2004 and, as the Post wrote, ``found that they
tended to grow domestically as well, hiring more U.S. employees, paying
them more and spending more on research.''
The study concluded that ``the average experience of all U.S.
manufacturing firms over the last two decades is inconsistent with the
simple story that all foreign expansions come at the cost of reduced
domestic activity.''
New taxes could encourage some companies to locate more or all of
their operations abroad, where they could remain more profitable, since
many countries do not tax income earned outside their borders. That
could really happen. There is nothing that says corporations have to be
located in the United States. U.S. multinational corporations will have
little incentive to invest and hire here if tax policy prevents them
from realizing attractive returns.
The McKinsey report cautions that policymakers have to be diligent
about enacting policies that maintain U.S. economic competitiveness:
The United States retains many strengths that make it one
of the most attractive markets for multinational companies'
participation and investments. But numerous fast-growing
emerging markets [such as China, Brazil, and India] and some
advanced economies are making huge strides in increasing
their attractiveness, and are thereby influencing how
multinationals decide where to participate and invest. Thus,
the United States has entered a new era of global competition
for multinational activity. . . . Many of the executives we
spoke with emphasized the need to ensure they are competing
on a level playing field.
So let us not give foreign competitors a new edge by raising taxes on
American companies that create new American jobs.
A second point: Many American companies establish operations abroad,
not ``to export jobs'' for reasons of ``greed,'' as some of the bill's
supporters charge, but to break into foreign markets, add new
customers, or cater to a larger market abroad. The Pepsi example I just
discussed illustrates this point.
According to the Department of Commerce, only 10 percent of foreign
subsidiary sales are into the United States. So 90 percent of the
subsidiaries' sales are in foreign markets. This statistic shows that
the vast majority of companies are not moving manufacturing overseas
only to sell goods back to the United States at a savings, but rather
to cater to their customers.
A third point: Rather than picking winners and losers shouldn't we
create an environment in which all companies become even more
competitive?
One way to do this would be to lower the U.S. corporate tax rate,
which is the second highest in the world. A recent article in National
Review points out that ``by mid-2009, the U.S. corporate tax rate,
including federal and state corporate taxes, was 39.1 percent. In
Western Europe, the corresponding rates ranged from 34.4 in France, to
26.3 in Sweden, to 12.5 percent in Ireland.''
The author of this article points out that on the most recent World
Bank list of places to pay business taxes, the U.S. ranks 61st out of
183 countries, behind France, Sweden, Holland, Switzerland, Norway, and
the UK.
This high corporate tax rate distorts business decisions, such as
locating investments; hinders capital formation; and suppresses wages.
Rather than increase taxes on certain companies, we should bring the
rate down to help correct these distortions.
Let me quote a couple of lines from the Wall Street Journal editorial
I mentioned before. They confirm:
The U.S. already has one of the most punitive corporate tax
regimes in the world and this tax increase [proposed in the
legislation before us] would make that competitive
disadvantage much worse, accelerating the very outsourcing of
jobs that Mr. Obama says he wants to reverse.
Paul Volcker, the handpicked individual of the White House on the tax
reform panel, whose report recently was received by the President, said
in the report:
The growing gap between the U.S. corporate tax rate and the
corporate tax rates of most other countries generates
incentives for U.S. corporations to shift their income and
operations to foreign locations with lower corporate tax
rates to avoid U.S. rates.
That is what is causing people to move abroad, the higher corporate
tax rates here. Yet the bill before us would raise those rates even
higher on companies that do business abroad.
One Volcker recommendation is to lower the corporate tax rate to
closer to the international average which would ``reduce the incentives
of U.S. companies to shift profits to lower-tax jurisdictions abroad.''
So rather than raising taxes to try to punish U.S. companies that do
business abroad, we should be reducing the tax rate to encourage them
to stay here. The Wall Street Journal concludes:
CEO Steve Ballmer has warned that if the President's plan
is enacted, Microsoft would move facilities and jobs out of
the U.S.
Thus proving the point. In fact, the chairman of the Senate Finance
Committee, my colleague Max Baucus, said in Congress Daily:
I think it puts the United States at a competitive
disadvantage. That's why I'm concerned.
A concluding comment from the editorial:
The lesson here is that tax rates matter in a world of
global competition and the U.S. tax regime is hurting
American companies and workers.
In conclusion, we are talking again about taxing Americans more at a
very time when we should be finding ways to reduce the tax burden on
Americans; in this case, so they can compete better with foreign
competitors.
I return to the issue before us and, unfortunately, it apparently
isn't going to be resolved before Congress leaves, and that is taxing
small businesses as well. The proposal of the President and those on
the other side of the aisle to raise taxes on American small business
men and women and thereby threaten job creation is exactly the wrong
medicine at this time. The proposed payroll tax holiday won't help
small businesses at all. We have been coming to the floor for weeks
saying: Don't increase taxes on any American. So far all we have seen
is efforts by the majority in one way or another to find a way to
increase taxes on segments of the American economy. That is precisely
what is being proposed in the legislation before us.
I reiterate, now is not the time to be raising taxes on anyone, let
alone companies that account for such a high number of new jobs. Let's
tailor our policies to help these companies employ even more American
workers.
Exhibit 1
[From the Wall Street Journal, Sept. 26, 2010]
The Send Jobs Overseas Act
Democrats may be dodging a vote on the Bush-era tax cuts,
but that doesn't mean they don't want to raise taxes before
November. Witness this week's showdown in Congress over
increasing the tax on the profits of American companies with
foreign subsidiaries to punish firms that relocate plants
[[Page S7459]]
overseas. How much more harm can this crowd do before it's
run out of town?
Like so many others, this tax increase is being promoted by
President Obama, who declared last week that ``for years, our
tax code has actually given billions of dollars in tax breaks
that encourage companies to create jobs and profits in other
countries. I want to change that.''
Democrats around the country are making this issue their
number one campaign theme, since they can't run on health
care, stimulus or anything else they've passed into law.
Think about this: One of the two major parties in the world's
supposedly leading economy is trying to hold on to its
majority by running against foreign investment and the free
flow of capital. This is banana republic behavior.
We're all for increasing jobs in the U.S., but the
President's plan reveals how out of touch Democrats are with
the real world of tax competition. The U.S. already has one
of the most punitive corporate tax regimes in the world and
this tax increase would make that competitive disadvantage
much worse, accelerating the very outsourcing of jobs that
Mr. Obama says he wants to reverse.
At issue is how the government taxes American firms that
make money overseas. Under current tax law, American
companies pay the corporate tax rate in the host country
where the subsidiary is located and then pay the difference
between the U.S. rate (35%) and the foreign rate when they
bring profits back to the U.S. This is called deferral--i.e.,
the U.S. tax is deferred until the money comes back to these
shores.
Most countries do not tax the overseas profits of their
domestic companies. Mr. Obama's plan would apply the U.S.
corporate tax on overseas profits as soon as they are earned.
This is intended to discourage firms from moving operations
out of the U.S.
The real problem is a U.S. corporate tax rate that over the
last 15 years has become a huge competitive disadvantage. The
only major country with a higher statutory rate is Japan, and
even its politicians are debating a reduction. A May 2010
study by University of Calgary economists Duanjie Chen and
Jack Mintz for the Cato Institute using World Bank data finds
that the effective combined U.S. federal and state tax rate
on new capital investment, taking into account all credits
and deductions, is 35%. The OECD average is 19.5% and the
world average is 18%.
We've made this case hundreds of times on this page, but
perhaps Mr. Obama will listen to his own economic advisory
panel. Paul Volcker led this handpicked White House tax
reform panel whose recent report concluded that ``The growing
gap between the U.S. corporate tax rate and the corporate tax
rates of most other countries generates incentives for U.S.
corporations to shift income and operations to foreign
locations with lower corporate tax rates to avoid U.S.
rates.''
As nations around the world have cut their rates, the
report warns, ``these incentives [to leave the U.S.] have
become stronger.'' Companies make investment decisions for a
variety of reasons, including tax rates. But as long as the
U.S. corporate tax is more than 50% higher than it is
elsewhere, companies will invest in other countries all other
things being equal. One Volcker recommendation is to lower
the corporate rate to closer to the international average,
which would ``reduce the incentives of U.S. companies to
shift profits to lower-tax jurisdictions abroad.''
Mr. Obama believes that by increasing the U.S. tax on
overseas profits, some companies may be less likely to invest
abroad in the first place. In some cases that will be true.
But the more frequent result will be that U.S. companies lose
business to foreign rivals, U.S. firms are bought by tax-
advantaged foreign companies, and some U.S. multinational
firms move their headquarters overseas. They can move to
Ireland (where the corporate tax rate is 12.5%) or Germany or
Taiwan, or dozens of countries with less hostile tax
climates.
We know this will happen because we've seen it before. The
1986 tax reform abolished deferral of foreign shipping income
earned by U.S. controlled firms. No other country taxed
foreign shipping income. Did this lead to more business for
U.S. shippers? Precisely the opposite.
According to a 2007 study in Tax Notes by former Joint
Committee on Taxation director Ken Kies, ``Over the 1985-2004
period, the U.S.-flag fleet declined from 737 to 412 vessels,
causing U.S.-flag shipping capacity, measured in deadweight
tonnage, to drop by more than 50%.''
Mr. Kies explains that ``much of the decline was
attributable to the acquisition of U.S.-based shipping
companies by foreign competitors not subject to tax on their
shipping income.'' Mr. Kies concludes that the experiment was
``a real disaster for U.S. shipping'' and that the debate
over whether U.S. companies can compete in a global market
facing much higher tax rates than their competitors was
answered ``with a vengeance.''
Now the White House wants to repeat this experience with
all U.S. companies. Two industries that would be most harmed
would be financial services and technology, and their
emphasis on human capital makes them especially able to pack
up and move their operations abroad. CEO Steve Ballmer has
warned that if the President's plan is enacted, Microsoft
would move facilities and jobs out of the U.S.
The lesson here is that tax rates matter in a world of
global competition and the U.S. tax regime is hurting
American companies and workers. Mr. Obama would add to the
damage. His election-eve campaign to raise taxes on American
companies making money overseas may not be his most dangerous
economic idea, but it is right up there.
The ACTING PRESIDENT pro tempore. The Senator from Nebraska.
____________________