A column by Kevin Hassett on Bloomberg.com this week suggested that if President Obama's international tax policy proposals are enacted, Microsoft will move out of the country.
Actually, quite the opposite is true. The President's proposals would reduce the perverse incentives in our tax code that currently reward companies for moving plants, profits, and people offshore. If they are enacted, Microsoft would have less, not more, reason to leave. The President's proposals would limit multinational companies' ability to reduce their U.S. tax by using deductions and tax credits attributable to their foreign income before the foreign income is taxed. The proposals would require matching of the income and deductions. (See the CTJ report explaining the President's international tax proposals.)
Hassett's assertions were based on Microsoft CEO Steve Ballmer's comments last week while in Washington, that "it makes U.S. jobs more expensive...we're better off taking lots of people and moving them out of the U.S." This strikes us as a lot of hot air designed to scare Americans and their lawmakers.
In support of his argument against changing the tax rules, Hassett also cites a study that shows for every 10 dollars U.S. companies invest offshore, their investment in the U.S. increases by about two dollars, and that foreign investment is therefore good for the U.S.
We might begin by pointing out that every ten dollars that U.S. companies invest in the U.S. result in at least, well, ten dollars of investment in the U.S. But this is largely beside the point. Many of the administration's proposals really address corporate tax avoidance practices that involve investments that only exist on paper anyway (think of Citigroup and its 90 subsidiaries in the Cayman Islands, which cannot possibly be conducting much real business). These are practices that serve only to reduce the U.S. taxes that corporations pay on the profits that are really generated in the U.S.
And as far as incentives to genuinely move real operations offshore, the current system of allowing tax deferral on foreign income encourages that. The President's proposals would begin to reduce that incentive (we wish they'd go farther).