U.S. multinational corporations play an invaluable role in the American economy. They are research and export intensive, and they provide tens of millions of high-paying jobs. Their worldwide distribution networks increase demand for domestic research, high-tech manufacturing, and management services. It is not in the interest of the United States to have multinationals' headquarters go abroad or for them to be at a competitive disadvantage to foreign-headquartered multinationals. We should always remain vigilant to problems, but as of now there is little evidence U.S. multinationals are going abroad and there is little evidence that U.S. multinationals suffer significant tax disadvantages vis-à-vis foreign headquartered multinationals.
Moreover, multinational corporations are only a part of the American economy. Multinational competitiveness is not an end unto itself. The competitiveness of the entire economy is what is critical to the standard-of-living of the American people. If job creation through tax reform is our goal, we cannot neglect small business. We cannot neglect large and mid-sized business that do not have foreign operations but nevertheless compete internationally (with their exports on foreign markets and with imports into the United States). We cannot close the door to highly mobile job-creating foreign companies that clearly have opportunity to locate their factories elsewhere.
Too often in Washington D.C. the term “competitiveness” is equated to the “competitiveness of multinationals.” This is a serious mistake. A far more important objective is promoting the overall competitiveness of the U.S. economy.
First, this tax-induced tilt of the playing field shifts economic resources to multinationals and away from the rest of the economy. This not only hurts small business but it hurts the overall economy because government rules get in the way of efficient free-market outcomes. Whatever the positive effects are to the United States of promoting the success of its homegrown multinationals, they are outweighed by the economic costs of distorted investment decisions.
And second, now that we have extremely tight budgets that require tax reform to be revenue-neutral—or perhaps even revenue-raising--any tax cuts for foreign operations of U.S. business are likely to mean tax increases for domestic business.
The best way for tax policy to promote domestic economic growth is to reform the tax system so that all job-creating sectors of the economy are taxed evenly. Therefore, if the Congress has opportunity to reform corporate taxes it would be far better to reduce our high corporate tax rate (which would be a direct incentive for domestic job creation) rather than make our already generous foreign tax rules even more favorable (which would be a direct incentive for foreign job creation).Proponents of reduced taxes on foreign operations of U.S. companies like to argue that direct incentives for foreign job creation will indirectly benefit U.S. job creation. I like to refer to this as trickle-sideways economics, a notion we should find no more compelling than trickle-down economics. In a purely domestic context, trickle-sideways proponents would argue, for example, that subsidies for businesses in Kentucky will increase job creation in Ohio. But this is an incomplete story that fails to address who is losing a job and who is getting a job. While it is true that the subsidies in Kentucky might result in some new jobs in Ohio, that fact would be cold comfort for the workers whose positions were moved Kentucky. Moreover, current Ohio residents (including those whose jobs were moved) would not necessarily be the ones to fill the newly created jobs. Finally, such a policy would be particularly hard for Ohio residents to stomach if they are the ones being asked to foot the bill for the subsidies in Kentucky.
A territorial tax system is not all that different from the hypothetical subsidy for jobs in Kentucky paid for by taxpayers in Ohio. A territorial system is the elimination of tax on foreign operations of U.S. corporations--a subsidy for overseas job creation. Even with the less generous subsidies offered under the present system (deferral as opposed to exemption) the jobs have gone offshore. Between 1999 and 2008, U.S. multinational corporations cut their domestic employment by 1.9 million. Over the same period U.S. multinationals increased their employment overseas by 2.4 million. The data simply do not support the trickle-sideways theory.