You may not know much about tax law, but if you’ve been watching Democratic campaign ads almost anywhere in the country you do know one thing by now: American corporations get tax breaks for shipping jobs to China. If not China, at least some place “overseas.”
"He voted for all the Bush policies that got us into this mess, like tax breaks to ship jobs to China," says an ad run by Illinois Senate Democratic hopeful Alexi Giannoulias against his Republican rival Rep. Mark Kirk.
In New Hampshire, Democratic House candidate Ann McLane Kuster accuses her GOP opponent Charlie Bass of voting “for tax breaks that encourage shipping jobs overseas.”
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Kuster’s TV ad shows a container ship heading away from the viewer off into the sunset, presumably bound for a foreign port. Kuster vows she will “close tax loopholes for corporations that ship jobs overseas.”
Meanwhile in Minnesota, Democrat Rep. Tim Walz tells viewers, “American jobs are heading overseas and we still give these companies tax breaks. I say if businesses pack up and leave Minnesota, we shouldn’t give them tax breaks to go.”
Why the message sounds familiar
The message has a familiar ring not just because you hear it from so many Democratic candidates this year, but because you heard the same claim made by Barack Obama in the 2008 presidential campaign and in 2004 from Democratic nominee John Kerry.
In 2008, an Obama ad accused Republican presidential candidate John McCain of supporting “tax breaks for companies that ship jobs overseas.”
It pointed to Corning plant in Pennsylvania that was closed in 2004. According to an analysis by the non-partisan FactCheck.org, the plant made cathode ray tubes, which were becoming obsolete. FactCheck.org called the Obama ad’s claims about tax breaks “misleading” and concluded that the tax law “isn’t the main reason companies decide to set up shop abroad.”
In 2004, Kerry ran ads calling for an end to “tax incentives that are encouraging American companies to ship jobs overseas.” He pledged to “repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas."
How the tax law works
The feature of the tax law being debated is called deferral.
It allows U.S.-based corporations to defer taxes on earnings of their foreign subsidiaries until they bring those profits back to the United States. In many cases, companies use foreign earnings to invest in their operations outside the United States.
“Most of the countries in the world that we compete against don’t tax the income earned by their foreign subsidiaries ever,” said Washington tax lawyer and lobbyist Ken Kies, former chief of staff to the congressional Joint Committee on Taxation. “Deferral is just a way of us sort of keeping up with the rest of the world, but it isn’t as generous as what most of the rest of the world has.”
Kies represents clients who would be affected by a change in the deferral rule.
In a 2007 report in the nonpartisan Tax Policy Center in Washington said that eliminating deferral of taxation on U.S. corporations’ foreign income “would substantially reduce the incentive to earn income in or shift profits to low-tax countries and would thus increase (tax) revenue” for the federal government.
But it warned that eliminating deferral could also “reduce the international competitiveness of U.S.-based multinationals by increasing their tax disadvantage” relative to foreign companies.
In September, the Senate voted on whether to proceed to a Democratic bill that would have eliminated deferral of corporate taxes in some cases. The motion to move ahead to the bill needed 60 votes to pass, but got 53. Every Republican voted no, as did five Democrats.
Democratic critique of deferral
“My colleagues say we have to have this principle called deferral,” said Sen. Byron Dorgan, D- N.D. during the Senate debate. “How about every American having the opportunity to defer their income taxes until it is more convenient for them?”
He said the bill was intended to limit deferral “a little bit because it gives a pernicious incentive to move jobs overseas.” But “we have people standing up saying: We support those companies that are moving American jobs overseas.”
Dorgan concluded, “If you have two kinds of corporations, and one decides to stay here and manufacture in our country and the other decides to take the jobs and move to a low-wage, lower tax alternative, I want to be helpful to that corporation … that keeps the plant open here and is proud to put a made-in-America label on their product.”
Doing business in China
For decades, American companies such as aerospace giant Boeing and heavy equipment maker Caterpillar have both exported to China and done manufacturing there. With an economy growing at nearly 10 percent a year, China is too important a market to ignore.
In the past several months Caterpillar has announced plans to build or expand operations in Suzhou, Wujiang, and Xuzhou, China — and also in Victoria, Texas, Sanford, N.C., Rapid City, S.D., and Winston-Salem, N.C.
Caterpillar spokesman Jim Dugan said, “We make products in China that are sold to Chinese customers. This allows us to competitively build a base of customers in China, which in turn helps us increase opportunities for exports of the products we make in the U.S.”
He said, “70 percent of our sales in 2009 were outside of the U.S., and yet people seeing or hearing many of the campaign commercials would think that this is a bad thing.”
He called the rhetoric about tax breaks to ship jobs to China “a scare campaign being waged with China as the bogeyman.”
Labor costs one factor in locating production
The election year debate over deferral has to some extent obscured another reason why firms — whether American or European or Japanese — might locate some of their operations in China: America’s per capita income is 13 times higher than China’s per capita income, according to World Bank calculations. Labor is much less expensive in China.
But the stereotype of an American firm using a low-paid Chinese worker to make things that once were made by an American worker is becoming less and less relevant.
As the Financial Times reported this week, multinational industrial firms such as General Electric and Siemens are increasingly losing out to firms owned by Chinese capitalists and employing Chinese workers. The American and European multinationals “have been shocked at how quickly China has emerged as a global competitor” in building high-speed rail projects around the world, the paper reported.
Despite the rhetoric and TV ads this election season, Kies said, “This is not a Democratic versus Republican issue. There are Democrats such as (House Ways and Means Committee member) Rep. Richard Neal who think the U.S. multinationals need deferral in order to be competitive.”
In any event, with Republicans likely to gain seats in Congress next week, the Democrats’ move to change the law on taxing overseas profits seems futile — at least until the 2012 campaign season begins.