Politics

Obama Launches Tax Attack on Top Companies

| by Cato Institute

by Jim Powell

In the name of tax reform, Pres. Barack Obama has announced $190
billion of tax hikes on many of the biggest U.S. employers. By reducing
after-tax profits, these tax hikes could hammer stock prices that
reflect investor expectations of future profits.

Among the employers in Obama's crosshairs: Aetna, Alcoa, Allstate,
American Express, Berkshire Hathaway, Best Buy, Cisco Systems,
Coca-Cola, Costco Wholesale, Dell, Dow Chemical, DuPont, Exxon Mobil,
Ford, General Motors, GMAC, Hewlett-Packard, Honeywell, IBM, Intel,
Johnson & Johnson, Kraft Foods, Kroger, McDonald's, Merck,
Microsoft, Motorola, News Corp., PepsiCo, Pfizer, Proctor & Gamble,
Safeway, Sears, Sprint Nextel, Supervalu, Sysco, Target, Time Warner,
Walgreens, and Walt Disney.

The stocks of these companies are in millions of portfolios held by
individual investors, mutual funds, and pension funds, as well as
endowments at colleges, hospitals, museums, and other institutions.
Obama's business-tax hike will hit Americans whose jobs and pensions
depend on these companies' success — particularly in tough times.
Colleges will have a harder time keeping tuition affordable if Obama
hammers their portfolio holdings, and hospitals will be under more
pressure too.

People and capital go where they're welcome, and when they no longer feel welcome, they move on.

Obama claims his tax hikes will "level the playing field." He
reasons that since U.S.-based companies doing business exclusively in
the U.S. don't get to defer U.S. taxes on profits earned overseas,
U.S..-based multinationals shouldn't be able to defer taxes either. He
wants all U.S.-based companies to be fully subject to U.S. business tax
rates that are among the highest in the world.

But U.S.-based multinationals are already paying taxes in the
countries where they operate. Almost all countries impose taxes based
on residency; you pay taxes where you live or operate. The United
States is the major exception, imposing taxes based on citizenship.
This means an American stationed abroad must pay taxes both to the
country where he or she lives as well as to the United States — double
taxation. Although an American can claim a credit on a U.S. tax return
for foreign taxes paid, he or she will still have to deal with tax
bills from two countries. In 2006, Pres. George W. Bush signed a tax
increase on Americans living abroad, and the New York Times reported
there was an increase in the number of Americans renouncing their U.S.
citizenship.

This gives you an idea how corporate decision-makers are likely to
feel about double taxation. A U.S.-based multinational company
operating abroad must pay taxes to the country where it operates. Obama
wants U.S.-based multinationals to pay taxes on their operations abroad
as if those operations were in the U.S. The bottom line is taxes to two
countries — heftier taxes, despite whatever credits might be applicable.

In the event Obama were able to impose such double taxation on the
offshore operations of U.S.-based multinationals, the consequences
could be devastating. U.S.-based business could be wiped out around the
world because of the difficulty of competing with offshore-based rivals
that have to pay taxes only to the (probably lower-tax) country where
they have operations. Taxes are just another cost of doing business,
and if they make the total cost of doing business excessively high, a
company is bound to lose market share and ultimately withdraw from a
market. Large numbers of U.S. jobs are related to business being
conducted overseas, so if overseas business contracts, jobs are going
to be lost here in America.

Obama, who lacks business experience, seems to imagine that the only
reason U.S.-based multinationals have offshore operations is to achieve
tax savings. Actually, a company is in a better position to compete
with local firms if it has an operation close to its market, compared
with a U.S. firm that ships its goods thousands of miles away. An
offshore operation is more likely to understand local market
conditions, tastes, and trends. Obama's double taxation would provide
perverse incentives for U.S.-based companies to give up knowledge,
relationships, and other advantages they spent years developing
firsthand in world markets.

Another possibility is that Obama's double taxation triggers an
exodus of U.S.-based multinationals that re-incorporate offshore. We
have seen how, during the past several decades, high New York City
taxes played a major role in the dramatic exodus of Fortune 500
headquarters to lower-tax states. More recently, we have seen how
California's high taxes have stimulated an exodus of companies from
that state, contributing to high-tech "clusters" elsewhere in the
country.

Consider how double taxation would affect incentives facing
U.S.-based multinationals that make more money abroad than they do in
the U.S: General Motors, for example. Why would GM endure double
taxation on its profitable overseas operations for the sake of its
unprofitable U.S. operation? If Obama had his way with double taxation,
we might wake up suddenly to find that GM had become a Swiss-based
corporation that walked away from its U.S. operation, leaving it in the
hands of the UAW and the U.S. Treasury (or maybe the post office).
There could be many defections from the Fortune 500 list.

By undermining the profitability of U.S.-based multinationals,
Obama's business-tax hikes would drive increasing numbers of Americans
to invest in more profitable offshore-based companies. According to the
Commerce Department's Bureau of Economic Analysis, U.S. investors
already hold some $5.1 trillion of stock in offshore-based companies.
This number could go up significantly. An accelerated outflow of
capital from the U.S. would be bad news for U.S. capital markets and
stock prices.

People and capital go where they're welcome, and when they no longer
feel welcome, they move on. Obama can talk all he wants about why high
taxes are fair taxes, but if they're significantly more burdensome than
what's being imposed elsewhere, employers and jobs are going to go
away, and all of us here will suffer.