President Obama's plan to tax US companies' foreign profits

In his relentless pursuit to find funding for overtly expansive social programs, the President is now looking towards American businesses once again, "to pay their fair share."

I don't think many people would disagree that most of the American tax code needs to be overhauled. First on everyone's list resoundingly would be the federal income tax, a not so distant second would probably be corporate tax codes. Conversely what the Administration is setting out to accomplish is less about reform and more about revenue generation for government operations.

The President's proposal from the Wall Street Journal.

WSJ-The White House plan has three main elements affecting businesses. It would curb corporations' ability to park their overseas business earnings indefinitely outside the U.S. and avoid U.S. taxes, a practice known as deferral. The plan would change the legal treatment of many international subsidiaries that companies have used to shift earnings into low-tax offshore havens. And it would put new limits on corporations' ability to use offshore subsidiaries to generate unjustified foreign-tax credits.

However, according to some criticisms from the usual suspects, and one you may not expect, there are some problems with the President's proposal.

From The Tax Foundation,

"The Obama Administration is proposing to raise more than $100 billion from American multinational corporations by limiting in some way the ability of U.S. companies to defer tax on profits earned abroad. The premise behind the proposal is that by raising the taxes paid on the foreign profits of U.S. companies earned abroad, the companies will somehow have more incentive to locate their operations here in the United States.

"The proposal, however, is flawed and fails to recognize that in the increasingly global economy where capital flows freely across borders, the United States can no longer expect other countries to follow its policies. The proposal will penalize the foreign operations of U.S. companies operating abroad and make it more difficult for them to compete with foreign companies.

"The manufacturing of tractors or generating facilities in places like China and India will be less likely to be done by U.S. companies. Rather, these business opportunities will more likely be won by the foreign competitors of U.S. companies with the economic rewards—jobs and profits—going abroad rather than U.S. companies.

Surprisingly, Clinton's former Secretary of Labor, Robert Reich, agrees to a point.

Robert Reich's Blog-The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.

Reich later draws some interesting conclusions as to why the Administration is attempting to go down this road. The first is for a bargaining chip to gain support for Universal Health Care from private businesses. A plausible analysis, however, I am not thoroughly convinced.

Obama knows he is entering waters in which his proposed social planning is going to eventually need funding from every working American in the form of tax payrolls. Regardless of what economic quintile they fall into. With the bill potentially coming due and congressional elections right around the corner some quick cash from a corporate shakedown might just be the answer. This scenario makes Reich's second reason a little more sound.

The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions, and the groups benefiting from the wealthy's tax-deductible expenditures on them, had enough political leverage to make it a non-starter. That means the White House has to find other sources of money.

President Obama's constant theme of punishment as motivation might work well with liberal and progressive cronies, but this is the real world. Big business will find a way to get around this. Then there is the idea of foreign competition offering tax shelters and havens for US based companies to move operations solely to their regions. Leaving absolutely nothing for the American people, Obama, or his agendas.

Instead of using a punishment attitude it might behoove the President to try a new approach, like positive reinforcement by lowering the corporate tax rate by half or more. Providing a climate that is conducive and not hostile to business might just motivate them to return. It's called an incentive, the thing businesses thrive on. Unfortunately this not likely since Obama's mind set is more about big government than the free market.