"The world has changed today. A global company can be headquartered wherever they choose. … Our global companies are taxed at a higher rate than other global companies around the world, and the trend is disturbing," he said.
Conservative economists also dispute the claim that the tax code causes companies to move jobs to foreign locations. Matthew Slaughter, a Dartmouth College economics professor who worked in the Bush administration, says that historically, multinationals that have added jobs at their foreign affiliates also have expanded hiring in the USA. As U.S.-owned foreign units prosper, their corporate parents must add accountants, marketing specialists and other managers at their U.S. headquarters.
In 2004, Slaughter released a study, based on employment data for the decade ending in 2001, which concluded that U.S. multinationals created two jobs in the USA for every job they added abroad. That comforting conclusion broke down in more recent years. From 1991 through 2005, multinationals created almost as many jobs abroad (3.6 million) as they added at home (3.8 million). "The aggregate statistics look different now," Slaughter says.
Today's U.S. tax system encourages corporations to structure their operations to shift profits to low-tax foreign locales such as Ireland, Bermuda or the Netherlands. That's especially true for companies that benefit from so-called intangible assets that are difficult to value. By assigning patents or other licenses to foreign affiliates, corporations can legally book profits in low-tax venues rather than the USA, economists say.
Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals' units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined. Viewed another way, each employee of a U.S. multinational in Ireland was worth more than $539,000 in profits, while their counterparts in Germany brought in about $16,000, according to the BEA.
"Multinationals move profits created in the U.S. via various accounting techniques. There's evidence they do that rather aggressively," says Clausing, the Reed College economist. "It's a big incentive to have some operations in Ireland. More jobs are in Ireland than would be there in the absence of this provision."
Drugmaker Pfizer, for example, operates five manufacturing plants in Ireland and employs about 2,200 there. The company declined to make an executive available for an interview, but spokeswoman Shreya Jani said via e-mail that taxes are only one consideration in investment decisions. "Other factors include trained workforce, environment, government regulations, union issues, among others," she wrote.
Corporate lobbyists say that any move to eliminate deferral would have to be packaged with a significant cut in the 35% corporate tax rate, something neither Democratic candidate has yet proposed. Otherwise, the largest companies, facing an effective tax increase, would have an incentive to switch their legal residence to another country. Most other nations tax their corporations only on the income they earn in their residence country. "If you don't do it right, you'll only encourage them to move offshore entirely," warns William Reinsch, president of the National Foreign Trade Council, which represents members such as Wal-Mart, Caterpillar and Ford Motor.