Jewish World Review April 2, 2004 / 12 Nissan, 5764

Robert Robb

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Kerry's tax epiphany makes some cents | John Kerry's corporate income tax reform, announced last week, was a welcome recognition that incentives matter.

Until now, Kerry has been demagogically denouncing "Benedict Arnold CEOs" who move corporate headquarters and jobs out of the United States.

But his tax reform proposal is grounded in the sober recognition that the real problem isn't the patriotism of corporate officials but a U.S. corporate income tax rate that is too high.

The nominal U.S. corporate income tax rate is 35 percent. According to a Department of Treasury study, cited by Kerry, the effective tax rate of American corporations is nearly 50 percent higher than the international average, 31 percent compared to 21 percent.

Moreover, unlike most of our international competitors, the United States also taxes the foreign-earned income of domestic corporations. American companies get a credit for foreign income taxes paid, but still owe Uncle Sam the difference between the lower foreign rate and the higher U.S. rate.

This is the reason some American companies are reincorporating elsewhere.

They will still pay the high U.S. rate on income earned in the United States, but will no longer also pay that higher tax on foreign income.

This high tax rate on foreign earnings also places U.S. companies at a disadvantage in international trade. To compensate, American tax law allows companies that form foreign subsidiaries to defer the higher U.S. tax until the money is actually repatriated to the U.S. parent.

As Kerry points out, this creates a tax incentive both to move jobs associated with international trade out of the U.S. and to leave capital earned in foreign markets at work there.

To ameliorate these effects, Kerry proposes to reduce the corporate income tax rate modestly, to 33.25 percent.

Donate to JWR

He also proposes to allow U.S. companies a one-time opportunity to repatriate foreign earnings at a 10 percent tax rate. At present, there is nearly $640 billion in accumulated foreign earnings being deferred. These are solid, useful proposals. But Kerry, unfortunately, wasn't willing to follow his epiphany that tax incentives matter to its logical conclusion, which is that the United States should stop trying to tax the foreign earnings of domestic corporations.

Instead, Kerry continues the deferral scheme, but only for money earned in the specific country in which facilities are located. In other words, earnings from international trade by U.S. foreign subsidiaries would be instantly subject to the still higher U.S. tax rate.

This would place U.S. foreign subsidiaries at an even greater competitive disadvantage. And substantially increase the incentive for U.S. companies with significant international earnings to reincorporate elsewhere.

Kerry says he would stop the "abuse" of companies reincorporating offshore, but that's easier said than done. And if done, would simply make U.S companies with substantial international income an even more inviting takeover target for foreign companies.

Kerry also couldn't resist a little industrial policy. He would provide an income tax credit to offset the payroll taxes for new-hires in manufacturing, other sectors subject to outsourcing and small business. Of course, it's economically counterproductive to use tax benefits to offset comparative advantages other countries may have. That simply delays needed economic adjustments.

If government is to ameliorate the dislocations of international competition, President Bush's proposal for individual retraining accounts makes far more economic sense.

By extending his payroll tax credit to small businesses, Kerry claims to be taxing them at a lower rate than Bush. But this ignores his personal income tax proposal.

Many small businesses have forms of organization, such as Subchapter S corporations, in which the earnings pass through to the owners and are taxed as personal income. They may be hit by Kerry's proposed higher rates on incomes more than $200,000 a year.

The Bush campaign instantly denounced Kerry's corporate tax reform proposals, saying they would make things worse. In some respects, that's true. But the Bush administration, for its part, has largely neglected corporate tax reform.

The most important feature of the Kerry plan is a recognition that a high U.S. corporate income tax rate is a serious problem. After "Benedict Arnold CEOs," that's both a relief and a serious contribution.

JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.


03/31/04: What could have prevented 9/11
03/26/04: Knock off the high-stakes blame game
03/23/04: McCain a ‘straight talker’? Who is he kidding?
03/17/04: Bin Laden makes distinctions?
03/12/04: In the dangerous neighborhoods, cause for hope, if not yet optimism
03/01/04: Greenspan view scary, but Dems in denial

02/27/04: How not to achieve a mandate

© 2004, The Arizona Republic