The tax dodge demystified

Listening to Barack Obama during the campaign you could be forgiven for thinking that there exists an IRS form somewhere that gives corporations a tax deduction for every job they eliminate here and move overseas.

I will stop giving tax breaks to corporations that ship jobs overseas, and start giving them to those that create jobs in America. Barack Obama, Speech at 2008 Democratic National Convention

We’ve got to stop giving tax breaks to companies that are shipping jobs overseas and invest those tax breaks in companies that are investing here in the US. Barack Obama, 2008 Democratic debate at University of Texas in Austin

What I do is I close corporate loopholes, stop providing tax cuts to corporations that are shipping jobs overseas so that we're giving tax breaks to companies that are investing here in the United States. Barack Obama, first presidential debate.

I want to end the tax breaks for companies that are shipping jobs overseas and provide a tax credit for every company that's creating a job right here in America. Barack Obama, third presidential debate.

This of course is utter nonsense. Economist Robert Samuelson takes a look at the issue and separates fact from fiction:

Listen to President Obama, and the status quo seems a cesspool. Pervasive "loopholes" engineered by "well-connected lobbyists" allow U.S. multinationals to skirt American taxes and outsource jobs to low-tax countries. So the president proposes plugging loopholes. Some jobs will return to the United States, and U.S. tax coffers will grow by $210 billion over the next decade.

Sounds great -- and that's how the story played. "Obama Targets Overseas Tax Dodge," headlined The Washington Post. But the reality is murkier; the president's accusatory rhetoric perpetuates many myths.

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly -- less so than their foreign counterparts.

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States) and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

The thing is, without even exploring the issue more in depth you already knew that Obama was being deceitful. The notion that the U.S. government was granting a loophole for companies is ludicrous and the reality is that Obama is engaged in a campaign to make U.S.-based companies less competitive.

That tax credit, meanwhile, for corporations who create new jobs seems to have gone out the window. Such is the state of politics in the era of hope and change.