"The problem is the company gets to deduct the cost of doing business right away, but they don't have to pay tax on the profits until they bring them back," says economist Jason Furman, director of The Hamilton Project in Washington, D.C.
Reform efforts thwarted
The deferral clause has been in the tax code for more than half a century and has outlasted numerous reform efforts. In April 1961, even as U.S.-backed rebels were dying at Cuba's Bay of Pigs, President Kennedy asked Congress to rewrite tax provisions that "consistently favor United States private investment abroad compared with investment in our own economy."
In 2004, the Democratic nominee for president, Sen. John Kerry, D-Mass., railed against "Benedict Arnold" corporations that exploited the tax system to outsource jobs to low-wage countries such as India.
Now, with ever-larger volumes of capital surging across national borders, corporations' foreign earnings are emerging as part of a broad Democratic critique of globalization. States such as Ohio, where Clinton scored an important primary victory on March 4, and Pennsylvania, which votes April 22, have lost tens of thousands of manufacturing jobs in recent years. Trade agreements and a tax code that encourages corporate flight are to blame, many Democrats say. "We're going to close every tax loophole that still gives one penny of your tax dollars to any company that exports a job," Clinton promised last month.
From 2000 through 2005, U.S. multinationals eliminated 2.1 million jobs at home while adding 784,000 to their payrolls abroad, according to the Bureau of Economic Analysis. At the end of 2005, the most recent statistics available, U.S. corporations employed almost 9 million people outside the United States.
Still, economists say there is no generally accepted estimate of the number of jobs moved offshore to capitalize on more favorable tax treatment. Kimberly Clausing, a professor of economics at Reed College in Portland, Ore., says the corporate tax code may account for up to 3 million jobs being abroad. Gary Hufbauer, an economist who has written a book on international taxation, puts the number at just 200,000.
Home and abroad
Whatever the employment impact, the deferral provision is costing the U.S. government money. A new study published in Tax Notes this month concludes that multinationals shifted almost $50 billion in income to low-tax countries in 2004, depriving the government of $17.4 billion in tax revenue. To recoup some of the lost cash, Congress in 2004 allowed corporations a one-time opportunity to repatriate profits at a special 5.25% tax rate. In 2006, corporations paid $354 billion in federal taxes.
So far, the Democrats have been alone in targeting for change the foreign income deferral. Presumptive Republican nominee Sen. John McCain of Arizona has called for a cut in the corporate tax rate to 25% but has not mentioned deferral.
The Bush administration warned last year that U.S. corporate giants are at a competitive disadvantage in world markets because foreign rivals pay lower taxes in their home countries. The Treasury Department last summer convened a conference on business taxation but has not developed any formal proposal. In an interview with USA TODAY earlier this month, Treasury Secretary Henry Paulson said U.S. multinationals would "shrivel up" if they were discouraged from investing abroad.