[Congressional Record (Bound Edition), Volume 156 (2010), Part 12]
[Senate]
[Pages 16526-16528]
[From the U.S. 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.
  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.''

[[Page 16527]]

  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 
     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

[[Page 16528]]

     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.

                          ____________________