President Obama’s State of the Union address gave a preview of several of the administration’s tax policies over the coming year, including tax incentives to encourage more U.S.-based multinational corporations to bring jobs back home.
Obama called atention to that theme during an appearance earlier in the month with a group of business leaders to promote the so-called “insourcing” trend (see Obama to Propose ‘Insourcing’ Tax Incentives). He elaborated on the virtues of bringing jobs back to the U.S. during his State of the Union address, which echoed the populist note that Obama increasingly has been sounding as the November election approaches (see Obama Backs Tax Reforms in State of the Union).
During his speech Tuesday night, Obama talked about lock manufacturer Master Lock, whose CEO told him a few weeks ago that it now makes business sense for him to bring jobs back home. For the first time in 15 years, Obama noted, Master Lock’s unionized plant in Milwaukee is running at full capacity. He called on business leaders to follow the lock maker’s lead and ramp up their hiring in the U.S.
“Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed,” he said.
Obama’s appeal to patriotism marks a significant shift from the outsourcing trend of a decade ago, when many large investors and stock analysts expected companies to have an outsourcing strategy. Outsourcing became almost a requirement for delivering value to shareholders, and nearly every company was expected to show it was delivering a leaner workforce. But of course that was one of the factors that led to the high unemployment we have today, along with technology changes, higher productivity, and the gradual obsolescence of industries that used to provide much-needed jobs. Obama laid out the history of some of those changes during his speech, but he also talked about ways to reverse the outsourcing trend, by introducing some tax incentives and taking others away.
“Right now, companies get tax breaks for moving jobs and profits overseas,” he said. “Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it. So let’s change it. First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home. Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here.”
A group of companies known as the RATE Coalition, which includes AT&T, Capitol One and Ford, supported Obama’s call for lowering the overall corporate tax rate. They have been lobbying for reducing the statutory corporate tax rate to 25 percent from the current high of 35 percent, even though many large corporations pay far less because of various provisions of the Tax Code.
Obama wants to remove those incentives that encourage companies to move jobs and profits to other countries.
“If you’re an American manufacturer, you should get a bigger tax cut,” he said. “If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers. My message is simple. It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I’ll sign them right away.”
Some of the international tax strategies employed by multinational corporations today include tax deferral, check-the-box and transfer pricing. Those were among the topics discussed Tuesday at a New York State Society of CPAs conference on international taxation. Allan Goggins, a partner at the law firm Barnes, Richardson & Colburn, talked about how customs agents now pay particular attention to transactions with China. “I would say the top three countries they are looking to scrutinize transactions from are China, China and China,” he said.
While China is our largest trading partner, Goggins pointed out, it is also one where items coming into this country are often claimed to be at less than fair market value.
Obama plans to toughen the anti-dumping laws and crack down on cases where China may be using unfair trade practices. He noted that his administration has brought trade cases against China at nearly twice the rate as the prior Bush administration and said he had stopped a surge in Chinese tires on the U.S. market. But he also plans to create a Trade Enforcement Unit that will investigate unfair trade practices in countries like China.
At the same time, Obama noted that many companies are already bringing jobs back to the U.S. because the cost of doing business in China has gone up. His administration’s plans to introduce tax incentives to encourage more U.S. companies to hire at home is likely to become a popular campaign theme as he works to get re-elected between now and November.
Also expect to hear him pushing more for the so-called “Buffett rule,” which he also discussed during the State of the Union—the notion that millionaires and billionaires should not be paying lower tax rates than the middle class. The release of Republican candidate Mitt Romney’s tax returns on Tuesday put that issue into stark relief (see Former IRS Commissioner Gives Blessing to Mitt Romney’s Taxes). Romney, who had adjusted gross income of $21.646 million in 2010, mainly from investment income, paid an effective tax rate of 13.9 percent.
“If you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions,” said Obama. “On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up. You’re the ones struggling with rising costs and stagnant wages. You’re the ones who need relief. Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.”
The Obama re-election campaign has been honing its arguments with Romney in mind. However, with Republicans in control of the House, and a 60-vote threshold needed to pass most legislation in the Senate, the administration is unlikely to get much of its tax reform plans passed this year. Obama called on Congress to help him get it accomplished. But right now, the payroll tax cut extension is the only item that appears likely to be passed in the near future, along with the usual tax extender items. He said his administration would do what it could without Congress, but he hopes to be able to get Congress’s cooperation to strengthen the economy. Given the stony reactions of many in Congress when he spoke about his tax proposals, he probably shouldn’t count on too much help there.
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