House Minority Leader Says that Loophole-Closing Provisions in Jobs Bill Would Push Jobs Offshore — When the Exact Opposite Is True
Speaking before business leaders in Cleveland on Tuesday, House Republican Leader John Boehner proposed a five-point "plan" to help the economy that mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing the President Obama's economic advisers. He also claimed that deviating from the Bush tax policies would hurt small businesses, which has already been refuted by CTJ and other experts.
Near the beginning of his speech, Boehner said that the $26 billion jobs bill recently enacted, H.R. 1586, "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."
That is literally the opposite of what the tax provisions in H.R 1586 do. The provisions in this jobs bill close existing loopholes that, to use Mr. Boehner's words, "make it more expensive to create jobs in the United States and less expensive to create jobs overseas."
In fact, these loopholes can result in U.S. corporations enjoying a negative effective tax rate on their offshore investment income. This creates a strong incentive for U.S. corporations to shift profits offshore, either through accounting gimmicks or by moving actual operations and jobs offshore.
The Foreign Tax Credit
The loopholes that were shut down relate to the foreign tax credit, which U.S. taxpayers take against their U.S. taxes for any foreign taxes they pay. The idea is that if an American earns some income in, say, the U.K. and pays taxes to the U.K. on that income, he or she should not have to pay all of the applicable U.S. taxes on that income also. In other words, the foreign tax credit is meant to avoid double-taxation of Americans' foreign income. U.S. corporations use the foreign tax credit for income they generate abroad, but the problem is that many have found ways to take foreign tax credits in excess of what they need to avoid double-taxation.
For example, U.S. corporations don't even have to pay U.S. taxes on any of their foreign income until they bring that income back to the U.S. (until they "repatriate" that income), which in many cases they never will. But many have found ways to take foreign tax credits on this foreign income — even though it's not even taxed in the U.S. Obviously, this has nothing to do with avoiding double-taxation.
This means the foreign tax credits are being used to reduce the corporations' U.S. taxes on its U.S. income. The corporations are taking more foreign tax credits than they even need to wipe out their U.S. taxes on that foreign income. This also means the offshore profits are effectively subject to a negative rate of taxation in the U.S.
It's hard to imagine a stronger incentive to shift investments — and in some cases, actual jobs — offshore. This incentive to shift investments offshore has been greatly reduced by H.R. 1586, the law Boehner criticizes.
Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.
The corporate community has been remarkably effective at confusing everyone about this issue, partly because so few people understand it. Even the Peter G. Peterson Institute, named after and funded by the man who has become famous for lecturing America on budget deficits, issued a report opposed to the provisions that close these loopholes in the foreign tax credit. (See CTJ's response to the Peterson Institute.)
The Jobs Bill, H.R. 1586
The law that Congressman Boehner is criticizing, H.R. 1586, the Education Jobs and Medicaid Assistance Act, provides $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. The non-partisan Congressional Budget Office (CBO) has found that aid to states is one of the most effective measures to create jobs. (The income tax cuts that Boehner endorses, particularly income tax cuts for the rich, are the least effective measures for creating jobs, according to CBO's findings.)
Since the bill included the most effective possible job creation measures and offset the costs by closing tax loopholes that encourage U.S. corporations to shift profits and jobs offshore, it's about as close as Congress ever comes to a win-win proposal. We're glad that President Obama has signed it into law.