Tax Breaks for Jobs

Big Business wants them, and Washington may cave. But will they really boost employment?

By Ken Stier Monday, Feb. 07, 2011
    • Illustration by Ed Nacional for TIME

    If you need any further lesson in how globalized U.S. companies have become, consider the current battle between Washington and Big Business over tax breaks. Shortly after the Obama Administration settled into D.C., it rolled out an ambitious plan to close tax havens and loopholes and eliminate perverse incentives that encouraged companies to keep money abroad rather than bring it back to the U.S. One of those, a law that allows companies to defer paying taxes on money earned abroad, but only as long as they keep it there, is now up for review. Under pressure to be more business-friendly, the government is considering potentially significant tax reforms, even possibly opting for a territorial tax system, in an effort to encourage firms to bring that investment — and, hopefully, new jobs — back home. "It's a no-brainer," according to Cisco CEO John Chambers, who is pushing for the tax change along with a number of other FORTUNE 500 CEOs.

    Is it really? History, along with future business trends, would indicate the situation isn't as simple as that. Back in 2004, the Bush Administration offered a temporary tax holiday on foreign earnings. Some $300 billion in profit was repatriated. But instead of being invested in R&D;, new factories and hiring (which is what the current Big Business lobby claims it would do), 92% of that money went straight to dividend payouts, stock buybacks and corporate coffers. Companies got richer, but average people didn't.

    There's little reason to think things would be different this time around, thanks to the rise of an emerging-market middle class. Growth is in the developing world, and that's where about a third of the FORTUNE 500 now makes more than half its revenue, according to research firm Capital IQ. It's one of the reasons the largest and most globalized American companies have been beating the market in recent years, even through the recession. (Investors take note: U.S. firms with heavy exposure in China, Brazil, India, Turkey and other emerging markets will likely continue to outperform the market.) Given that the majority of future consumers are in these places, along with increasingly productive and well-educated workforces, higher-cost U.S. workers will continue to face overseas competition for jobs, whatever short-term tax break might be offered.

    It's also worth considering the validity of pleas by American Big Business that it currently pays one of the world's highest overall tax rates (35%) by statute. In fact, the rate paid after foreign governments get their cuts and the accounting alchemists do their magic on balance sheets — especially on foreign subsidiaries, which are easily made to "disappear" on paper — is more like 2.3%, according to the Treasury Department. This is probably one reason that Obama's former economic counselor Larry Summers has advised corporations to "think very hard about their obligations as citizens of this country." Bottom line: while it's clear the U.S. needs innovation and higher-end jobs to meet a $500 billion-a-year target for deficit reductions, it's not clear that a tax holiday for Big Business is the way to get there.