Obama Continues to Punish Business

The President’s war on business continued today with his wrong-headed plan to increase taxes on U.S. companies conducting business overseas. His effort was cloaked in populist hogwash. The Washington Post headline proclaimed, “Obama Targets Overseas Tax Dodge”. Ugh.

To refresh those who may not play as close attention: the United States has a 35% corporate tax rate as compared to the 12% - 15% range generally elsewhere in the industrialized world. Far from be a "tax dodge", it helps put American industry on a level playing field with the international community.

Let’s say that the heavy equipment manufacturer Caterpillar had a facility in Ireland where they made equipment for the European market. Profits from that facility would be taxed at the Irish rate (12%). It would only be taxed in the United States should Caterpillar bring those funds into the United States to, let’s say, improve a facility in Rockford, Illinois.

With the President’s plan, Caterpillar would be required to pay the additional difference between the U.S. tax rate of 35% and the rate actually paid in Ireland (35% - 12% = 22%).

Supposing Caterpillar had profits of $100 million dollars in 2010. Under the current tax laws, Caterpillar’s Irish operating unit would pay $12 million in taxes, and there would not be any U.S. tax liability unless Caterpillar were to bring the profits into the United States. Under the Obama plan, Caterpillar would have an additional $23 million dollars in tax liability whether they did, or did not bring the profits into the United States.

The President’s plan runs contrary with the prevailing wave of international tax policy. Most recently the United Kingdom and Japan both eliminated all taxes on profits earned overseas.

Describing the current situation the President said, “It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York." The President’s proposal discourages both.

Let’s continue the Caterpillar example. Under the President’s plan Caterpillar would be less profitable in the European market as they would need to increase prices to maintain profitability. Market forces are something which seems to evade the President who has previously noted his distrust of business. If we assume that Caterpillar has an operating margin of 25% (a generous margin in heavy equipment), then they would need to sell an additional $92 million dollars worth of equipment to maintain their prior level of profitability.

John Castellani, president of the Business Roundtable, a coalition of the nation's largest firms, called it "the wrong proposal at the wrong time for the wrong reasons" that will "make us less competitive in the international marketplace, where, by last count, 95 percent of the world lives.”

Bottom Line: The proposal is nothing but populist B.S. and it’s impact is bound to make U.S. companies less competitively internationally. I cannot imagine any advisor to the President recommending this course of action unless the goal was to actually cripple U.S. industry.