For years now, politicians have been promising to do something about the flight of American jobs overseas. So why does Washington continue to reward companies that invest abroad? That’s right, reward. Because our tax code actually encourages companies to do business in places like Mexico, China, and India-which sticks the rest of us with a higher tax bill.
“The U.S. tax code is set up so that if I am a U.S. corporation trying to decide whether to create jobs in Ohio or in Ireland, it will point me toward Ireland,” says Martin Sullivan, a contributing editor at Tax Analysts, a nonprofit organization that tracks tax policies worldwide.
Don’t believe it? Here’s how it works: In theory, the government taxes the worldwide earnings of U.S.-based companies. But under the federal tax code, American companies have to pay taxes only on the earnings of their foreign subsidiaries when they bring that money back to the States. But there’s no rule saying those companies ever have to bring that money home. As long as they reinvest their foreign earnings abroad, they pay only the host country’s (usually lower) tax rate. That’s what you’d call a big, fat loophole, and big business finds a loophole like water finds a leak.
Many companies just plow the money they make overseas back into their foreign operations-things like factories that employ hundreds of workers. That means more economic growth for other countries-and less here at home. As a 2006 report by the nonpartisan Congressional Research Service bluntly put it, this scheme is “an incentive for U.S. firms to invest abroad in countries with low tax rates.”
We’re talking about dollar figures that will make your head spin. According to a 2006 government report, U.S. companies have nearly $500 billion stashed abroad that could be taxed here at home. A recent USA Today examination of Securities and Exchange Commission records discovered that General Electric had $62 billion stowed overseas; Pfizer, $60 billion; and ExxonMobil, $56 billion. A recent Tax Analysts study discovered that in 2004 alone, U.S.-based multinationals shifted nearly $50 billion in income to countries with lower taxes.
The problem is a tax law that was last updated during the Kennedy administration. During the Cold War, the government did have a good reason to encourage investment abroad: We wanted to extend American influence to combat Communism. No one would write the law this way today. But an army of corporate lobbyists are fighting to keep things just as they are. As Robert McIntyre of the Washington-based tax policy group Citizens for Tax Justice says, “There’s no benefit to anybody but the companies that do it.”