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April 7, 2008
Offshore Jobs and Taxes: Will Democrats Attack?
by Martin A. Sullivan

Full Text Published by Tax Analysts®

Document originally published in Tax Notes
on April 7, 2008.

This year's Democratic presidential candidate is likely to propose amending the U.S. tax laws that favor foreign over domestic job creation. During the last contest for the party nomination, presumed Democratic nominee and Senate Finance Committee member John F. Kerry, D-Mass., floated just such a plan. But after its launch in March 2004, the Kerry proposal never got much attention. (For details of the plan, see the sidebar below).)


SIDEBAR: The 2004 Kerry Plan for Creating U.S. Jobs

    If I am elected, I will fight for the most sweeping international tax law reform in 40 years -- a plan to replace tax incentives to take jobs offshore with new incentives for job creation on our shores.
-- John Kerry, Mar. 26, 2004
Kerry's tax plan had four major components:

    (1) a reduction in the corporate tax rate from 35 percent to 33.25 percent;

    (2) the repeal of deferral of taxation of foreign profits, except for those generated by foreign subsidiaries selling goods or services to foreign customers;

    (3) a temporary, two-year tax credit for increases in employment by small businesses and by industries threatened by international competition; and

    (4) a one-time, one-year reduced corporate tax rate of 10 percent for earnings of foreign subsidiaries repatriated to their U.S. parent companies.

Since 2004 the pressure to lower corporate tax rates has greatly increased. For example, both Sen. John McCain, R-Ariz., and House Ways and Means Committee Chair Charles B. Rangel, D-N.Y., have proposed lower corporate tax rates.

The American Jobs Creation Act of 2004 included a repatriation provision similar to part 4 of the Kerry proposal.

The most original component of the plan was part 2, a limited repeal of deferral. The exception for foreign subsidiaries selling to foreign customers was designed to counter a common objection to the repeal of deferral: that repeal would hurt U.S. exports because a significant portion of U.S. exports goes to foreign subsidiaries of U.S. companies. (For prior coverage of the Kerry plan, see Tax Notes, Apr. 5, 2004, p. 19, Doc 2004-7188, or 2004 TNT 66-6 ).)


Nobody should assume that a 2008 version of the Kerry plan would suffer the same fate as its predecessor. There has been a dramatic change in the jobs situation since 2004. Back then, U.S. multinationals were creating more jobs in the United States than abroad. Now U.S. multinationals are creating jobs abroad while reducing jobs at home. (See figures 1 and 2.) These new, politically powerful findings will make it much harder for business groups to deflect Democratic attacks on current law that allows deferral of taxes on foreign profits.

The Scene in 2004

Not surprisingly, conservatives and business groups bombarded the Kerry plan with criticism. One of their most effective counterarguments came from Dartmouth economist Matthew Slaughter, who later served on the president's Council of Economic Advisers from 2005 through 2007.

In a 2004 paper, Slaughter presented data from the U.S. Commerce Department showing that between 1991 and 2001, parents of U.S. multinational corporations increased employment from approximately 18 million to 23.5 million -- an increase of 5.5 million jobs. Over the same period, U.S. multinationals increased employment in their foreign affiliates from 6.9 million to 9.8 million -- an increase of 2.9 million.

And so, Slaughter concluded: "For every one job that U.S. multinationals created abroad in their foreign affiliates they included nearly two U.S. jobs in their parent operations." ("Globalization and Employment by U.S. Multinationals: A Framework and Facts," Daily Tax Report, Mar. 26, 2004. Emphasis in the original.)

That study was supported with funds from the Coalition for Fair International Taxation, a group of about three dozen U.S. multinationals run by Ernst & Young's Washington lobbying arm.

At the time, the study was widely cited -- by, for example, the Republican National Policy Committee, individuals testifying before Congress, and The Economist. More recently, the Treasury Department cited the study in its December 2007 report on taxes and competitiveness (Doc 2007-27866, 2007 TNT 246-31)).

Its most prominent mention was probably in the May 27, 2004, Wall Street Journal article "Outsourcing 101." Citing the Slaughter study, the article concluded: "Jobs created overseas generate jobs at home."

Figure 1. The View Then...
U.S Multinational Job Creation
Between 1991 and 2001

Source: Matthew J. Slaughter, "Globalization and Employment by
U.S. Multinationals: A Framework and Facts", Daily Tax Report,
Mar. 26, 2004.

What's Changed

At the time the study was published, the most recent data available from the Commerce Department were for 2001. Now we have data through 2005, which present a startlingly different picture from the original Slaughter study. Between 1999 and 2005, parents of U.S. multinational corporations decreased employment from approximately 23 million to 21.8 million -- a decline of 1.2 million in U.S. jobs. Over the same period, U.S. multinationals increased employment in their foreign affiliates from 9.2 million to 10.3 million -- an increase of 1.1 million.

To paraphrase the interpretations made in 2004: For every one job that U.S. multinationals created abroad, they cut about one U.S. job in their parent operations.

Caveat and Conclusion

The latest data show that over the last few years, U.S. multinational corporations have dramatically shifted their employment patterns. Instead of creating the majority of new jobs in the United States, they are now reducing U.S. employment while increasing employment abroad.

Figure 2. ... And the View Now
U.S. Multinational Job Creation
Between 1999 and 2005

Source: Calculations using data from Table 1 of Ray Mataloni,
"Operations of U.S. Multinational Companies in 2005," Survey of
Current Business, Nov. 2007.

By no means do the facts alone mean the United States needs a major change in tax policy as suggested by Democrats. These job shifts may be the inevitable result of globalization and the lower wage rates available abroad and may have nothing to do with taxes. (We shall explore in our next article whether the jobs are going to low-tax countries.) But U.S. tax policy tilts the playing field in favor of offshore investment over domestic investment. And the tenuousness of the link between cause (favorable tax rules for offshore investment) and effect (job shifting by U.S. multinationals) may be a little too subtle for election-year politics. The new data have thus removed one of the key objections to any Democrat antideferral proposals.

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