ray

http://story.news.yahoo.com/news?tmp...n_kerry_tax_dc

By John Whitesides, Political Correspondent

WASHINGTON (Reuters) - Democratic presidential candidate John Kerry (news - web sites) will propose a broad change in international tax laws on Friday designed to discourage companies from shifting jobs to foreign countries.

In a speech in Detroit, Michigan, Kerry will propose ending a tax provision that lets companies defer paying U.S. taxes on income earned by foreign subsidiaries. He would use the $12 billion in annual savings for a 5 percent cut in corporate tax rates.

"Today we have a tax code that does more to reward companies for moving overseas than it does to reward them for creating jobs here in America," Kerry said in remarks prepared for delivery at Wayne State University in Detroit.

The proposal, one piece of a broader job-creation package to be unveiled over the next few weeks, adds to a growing election-year debate about U.S. companies that have shifted jobs overseas in search of higher profits.

Kerry called the plan potentially the biggest change in international tax law in 40 years.

"If a company is torn between creating jobs here or overseas, we now have a tax code that has American taxpayers paying to ship jobs overseas," he said in his scripted remarks. "That makes no sense."

Under current law, U.S. companies do not have to pay taxes on their foreign income until they bring it back to the United States. If they keep it abroad, they can avoid taxes entirely.

Aides said Kerry's plan would tax profits from foreign subsidiaries just like domestic profits and still allow companies to defer the income earned by production in a foreign country that serves foreign markets.

"He is eliminating what is a very clear incentive to relocate jobs overseas and then keep the profits overseas," said Kerry economic adviser Gene Sperling, who estimated the changes would affect about 600 U.S. companies.

The estimated $12 billion in annual savings would pay for a cut in corporate tax rates, from 35 percent to 33.25 percent, that would go to nearly all U.S. companies, aides said.

Kerry's plan also would expand a proposal for a manufacturing job tax credit that he first made last summer to include industries that the Commerce and Labor Departments determined to be at risk of being outsourced.

It also would offer a one-year, 10 percent tax holiday to encourage companies that are keeping profits overseas to avoid taxes to bring them back to the United States.

The Detroit address is the first of three speeches Kerry will deliver in the next few weeks outlining his plans to create more jobs, aides said.

The second will focus on proposals to ensure Americans have modern job training and skills, and the third will outline efforts to restore U.S. fiscal discipline and economic confidence.
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Although this may seem like a good change for the economy, this plan could effectively end up eliminating thousands of jobs domestically and internationally. Certain industries have outsourced or shifted their employees to other countries so that they can continue to offer everybody competitive prices on their products. Generally speaking, if a company can't compete in a marketplace they will 1) scale down their operations, which usually means many layoffs or 2) file for bankruptcy. That is a lose lose situation for ALL of the employees.

What will Kerry's response be if, for example, companies that outsource are hit with heavier taxes on those workers? The companies will have to find a way to subsidize those costs by 1) raising prices on their products or 2) cutting back somewhere else (which could potentially lead to job cuts or salary decreases). Speaking from a consumer's standpoint, higher prices suck. If I could buy a flash memory card for $50 from Staples for $35 from newegg.com I would order from newegg.

Though his intentions are good, I think that the long term success of such an initiative will fail. His second proposal to ensure Americans have modern job training and skills is far fetched as well. I have worked over a dozen jobs and internships in the past 8 years. All of my training has been performed by my employer, not the government nor some regulatory agency. So, who is spending the money to train me? The company. Who is utilizing manpower and resources to train me? The company. How does John Kerry think he can implement a plan to ensure Americans are given adequate and proper job training across every industry? It certainly won't be done in the 4 or 8 years he's in office.

Personally, I see more downside than upside to his proposals. Perhaps there is more than meets the eye, but his argument that companies are shifting jobs to create larger profits is correct, from one aspect. Viewing it from a consumer's aspect, the only way a company like Dell can offer me a computer loaded with the necessities for $350 (versus the $1,000 it would have cost 5 years ago) is by engaging in these price wars with their competitors and cutting their overhead costs (ie: outsourcing jobs overseas).

Sure, it would be great to bring more jobs back to the United States, but how many of us here on the boards are willing to be a customer service representative talking on the phone all day? I know I wouldn't enjoy that job, and I am guessing most of you wouldn't want to do it, including John Kerry.

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cheapie

i'm interested to see what lk thinks of this.

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LegendKiller

This plan could work for a short run stop-gap measure to get him elected. Sure, you can tax those oursourcing companies more while taxing non-outsourcing less. You have to remember that there are a few reasons to have overseas operations.

1. Serve markets overseas using overseas production.

2. Serve domestic and overseas markets using overseas production.

3. Use overseas labor to serve domestic markets.

4. Use overseas markets supplied by domestic labor.


First off, many companies simply have foreign subs that supply markets with goods, both domestic and foreign produced. With that revenue now being taxed, those companies will eventually have to downsize that area since it will be much less profitable. This, in turn, will also lead to massive write downs of assets, sagging of corp profits (short term), and long-term problems since foreign competitors will be able to have a safe-haven to grow and then take their products to america in a cheaper manner.

Foreign production of domestic goods is actuall good, since it does deliver a cheaper product, which in turn, saves dollars for everybody. So even if people lose their jobs, enough wealth is still maintained that it is balanced.

If a company, as Ray mentioned, does not decide to relocate, those higher taxes ARE paid by you and me. I doubt companies will relocate, since, as I said, this results in massive profit losses (write down in assets sold for a loss most likely, since the market will fall under them). Since those costs are passed on, we all bear the burden and subsidize jobs within this country.

Protectionism and subsidizing labor is a stoopid way of maintaining an economy. Look at the CA dock workers, they wont modernize, they wont improve processes, but they all make 100k+ for unskilled labor while being 1/4 as fast to unload as a mexican port.

Look at farming, we pay people NOT TO PRODUCE. How the fsck does that make ANY sense?

The frictions involved in such protectionism cost this country more than any job loss could ever result in.

All Kerry is doing is pandering to the unions with this BS, most likely it wont happen, companies will just bring out the lobbyists.

He is smart for spouting this BS to get elected, but he is a complete moron if he thinks it will work.

LK

cheapie

i think it will work for companies like mine. our purchasing people are judged on the content of our products that is from offshore. the higher the content, the better his rating. that's bull****. he's being rewarded for putting americans out of a job. it's one thing if his measurable is cost savings but....grrr....

LegendKiller

So, the other solution is for your company to NOT do this, raise prices, lay off people once others go and buy another company's equipment. Or, just make another company subsidize your job so I have to lose mine because they still need to keep profits up? Or, have company 2 pass on the costs to consumers, who then have less money to spend on other stuff AND then THOSE companies have to lay off workers. How about they do keep affording everything else, but they charge it instead. THus, bankruptcies skyrocket, losses for investors in the credit companies skyrocket, and massive layoffs happen. However, lets say they pass their costs onto consumers with higher interest rates, borrowing becomes more costly and people stop doing it, demand goes down and even more workers lose jobs.

All just because we have to save ONE job, we lose 20 more...good plan.

LK

cheapie

that's assuming that going offshore always results in a cost-savings. my point is that the dept is being graded on how much sourcing they are doing overseas, whether or not it has a positive cost impact. if it's cheaper overseas, go ahead and source it there or put pressure on domestic suppliers to match cost. but don't just move it for the sake of moving it.

ray

wow, we agree.

gear02

I think this is pretty dumb (this is coming from a independent, but hates bush), and it's obviously targeted at corporations as well as the general public (kinda playing both sides).

He should go after all those damned corporations that base themselves in tax havens (bermuda, etc.) to avoid paying income taxes. My dad's company does this and they are always laughing to see their paychecks come from a bank in the cayman islands.

He should go after all these bloody CEOs who make millions of dollars, get paid huge bonuses for ripping companies apart all while normal employees are asked to take a pay cut or are layed off, for questionable accounting practices, etc. If you want a recent example, see AMS (my company) who got split up and the CEO gets stock options and about $5 million for doing a really crappy job.

Of course, he won't do that cause he needs the support of these corporations who contribute to both campaigns to hedge their bets. Neither will Bush because both these fools are in the corporations' pockets.

yeah...i'm kinda jaded...

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tupacboy

he says it now... give it 2 more weeks... bet he'll says likewise if the public wants it... someone needs to tell kerry to grow some ballz... stick to what he voted for... and stop freaking trying so hard....

slaus

Is it me or does Kerry want to return the US to a state of autarky? The gains associated with trade in either services or goods as is the case with outsourcing outweigh the jobs that the US has "lost" to it. The last thing we really need is to start protectionist policies that serve no one and will actually lower consumer surplus.

LegendKiller

He's looking for a foothold in anything he can get his hands and feet onto. He faces an uphill climb and will use anything a normal voter will look and say "he's right, overseas production is evil".

However, the second he will get into office he will not change anything, because he also has economic advisors that will tell him (and he probably already agrees with) that protectionism is nothing but a subsidy that the entire society pays to ensure jobs for the few. The economic cost is greater than the benefit.

LK

ShawnLee

Does it scare anyone else that Kerry wants to buddy up with European punks in military matters, but wants to start a protectionist policy of economic isolationism? If I didn't already like Bush, he would've become my choice based on that.

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gwilks98

Funny you should mention this. I was reading the Economist on the way back from Atlanta and found it worth quoting:

"George Bush will try to make quick work of John Kerry in America's election campaign this year by painting the Massachusetts senator as merely another tax and spend liberal. But the president's task has just become harder. That is because Mr. Kerry, in a recent speech in Michigan, a state that has suffered thousands of job losses since 2001, made a rather unexpected proposal. The man who rails at "Benedict Arnold CEOS" said that he wants to cut corporate taxes.

Well, almost. To be sure, Mr. Kerry's plan would cut the top tax rate on all American corporate profits from 35% to 33.25%. The details, however, are less encouraging. Mr. Kerry wants to eliminate a "tax break" that allows American firms to avoid American tax on foreign earnings that are not brought home.

Yet this "tax break" is not uite the example of corporate welfare that Mr. Kerry claims. After all, America has one of the more imperialistic tax codes in the world. Amost uniquely for a rich coutry, America's taxmen take a bite out of its corporations' (and as many expats learn, its citizens') "worldwide income". Most rich countries' tax collectors worry far less about what goes on outside their borders. America's deffered taxes on foreign earnings have been an attempt to bring America's corporate-tax code closer to those of other countries.

Mr. Kerry's real concern, of course, is not with philosophical questions of international taxation. Instead, he wants to slow the loss of American jobs to cheaper countries. But such tinkering with the tax code is the wrong way to go about it. Mr. Kerry's plan does little to make America more attractive to investment and new jobs at a time when many countries are slashing corporate-tax rates to much lower levels. It will make America's hideously complex tax code more so. Much worse, it tries to hamper trade thorugh a change in the tax law. This is anything but "tax reform."

Later on, the article says this:
His tax plan nonetheless amounts to protectionism by other means. For it is aimed squarely at dscouraging manufacturing abroad by American compaines. But it is a bizarre type of trade barrier, because it hits only imports from American firms abroad. A Japanese-owned factory in Malaysia, for example, exporting semiconductors to America by paying only local taxes, would be at a great advantage against a similar american-owned plant, which would be subject to america's higher tax rate. Mr. Kerry thinks he is encouraging bosses to keep jobs at home. Instead, he may just prod American consumers to buy even more from foreign companies.

Mr. Kerry says he wants to level the tax rate between American firms' manufacturing in america and their manufacturing in foreign coutries. But genuine tax reform would level the playing field by bringing all corporate taxes down radialy rather than slapping what is in effect a big new tax rise on American firms' forieng operations. The timeing of Mr. Kerry's plan is especially bad. Tax competition is surging aroundt he world. Ireland has used low corporate taxes to fuel a surge in investment and sharp reduction in unemployment. Central European countries from Estonia to Slovakia are now catching on. Russia's taxes are a flat 24% of profits.

For sheer political cleverness, Mr. Kerry's plan deserves full marks. Voters are anxious about offshoring, and domestic firms at least will be grateful for the cut in their rates. Indeed, with his new enthusiasm for rate cuts, Mr. Kerry may yet shed the lable "Liberal". But that should not distract from the truth about his proposal: it is unwise, likely to be conterproductive and seems to be meant mostly to mislead voters.


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Sorry, I typed that one out myself, so there's bound to be plenty-o-typos.

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ShawnLee

Good read. That's pretty much what I'm talking about. If you think through Kerry's economics, it's the only logical conclusion. It can't help but be inflationary, protectionist, and an action of international antagonism (which is what he accuses Bush of doing).

bigotedson

well we can argue and fight all we want but the fact is...we are moving towards a global economy....and things like this ....for sure will come up in every country..

not sure what the solution is but....I am sure about one thing..in any economy.. only RICH gets RICHER..