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Bruising Buffalo,too

Obama’s tax changes meant to hurt Indian workers will hurt US ones

There was always a worrying strand of thoughtless populism in Barack Obama’s campaign. As these columns pointed out at the time,it missed several opportunities to educate the American voter about the costs and benefits of globalisation. Some of those chickens are now coming home to roost. Obama’s discussion of his administration’s tax priorities is an excellent illustration of the dangers of sloppy thinking.

The focus was on corporate taxes. The basic problem,as Obama laid it out,was that many large American companies pay a shockingly small amount in corporate income taxes. Clearly,the implication went,there are loopholes to be plugged. One such is the permission available under the tax code as it currently stands to “shift” tax income from a subsidiary abroad to low- or no-tax jurisdictions — tax havens — which then wipes out your tax obligations. There have been some eloquent defences mounted of this and similar practices; they might protect multinationals from double taxation. But that argument doesn’t always make sense,especially when it’s applied to companies that are truly multinational in that most of their taxable businesses benefit from the services provided by more than one government. Thus,from the point of view of establishing that tax havens are on their way out,this direction for policy is hard to fault.

Much,much more problematic and much,much less thoughtful are the planned changes that mean that multinationals headquartered in the US will no longer be able to defer taxes on income earned elsewhere if that income is re-invested in its own overseas subsidiaries. This has been dishonestly sold by the Obama administration as ending a “tax break for companies that move jobs overseas”; and,in his speech,Obama said that it would move jobs “from Bangalore to Buffalo”. That is disingenuous at best. What it means is that US companies won’t be able to expand their offshore hubs at a time when all constraints on expansion should be removed. This won’t help US competitiveness. Nor will US jobs be saved; indeed,this will serve as an inducement to move corporate headquarters offshore. The costs of business and labour are too high to play petty politics over. Obama’s silver tongue is better used making the case for strong,expanding companies.

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First published on: 06-05-2009 at 12:17:18 am
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