Maybe Bill Clinton really believed that the numbers in his economic plan would add up. Or maybe he was exercising the political campaigner's God-given right to fudge and exaggerate. Either way, those days are gone. Now that he's President-elect, his relatively pain-free prescriptions face a stark reality as they make the transition from promise to practice.
Probably Clinton's most dubious budget idea is his proposal to squeeze foreign companies doing business in the U.S. for $45 billion in taxes over four years. He would rely on that measure to provide nearly one-third of all the new taxes he will need to finance his program to reduce the deficit and increase public investment. The stratagem is characteristically Clintonian: an apparently painless (for Americans) way of generating revenue without raising unpopular levies like the gasoline tax or touching popular spending programs like Medicare.
Clinton's intention is to clamp down on non-U.S. companies that have been illegally shifting their profits abroad. Some companies do this by inflating their transfer prices, which are the amounts they charge their American subsidiaries for goods and services. This scheme boosts the profits of the parent companies back home and reduces the taxable earnings of the domestic affiliates. Clinton's advisers, who extrapolated their numbers from a study by a House Ways and Means subcommittee, are confident that they can generate enormous new revenues by stopping or penalizing those practices.
The problem with this plan, many economists say, is that it vastly overestimates the extent to which non-U.S. companies have been evading taxes. "The $45 billion number is out of sight," observes Gary Hufbauer, an economist at the Institute for International Economics in Washington. "He might get $6 billion in additional revenues." Says economist Rudolph Penner, the former director of the Congressional Budget Office: "The numbers are so far off what is reasonable that it's difficult to know where to begin -- $1 billion seems more likely than $45 billion." Aside from Clinton's proposal, the highest estimate of the revenue to be gained by closing loopholes on foreign companies comes from the Internal Revenue Service: at most, $13 billion over four years.
The main reason that Clinton's idea will not work is that foreign companies like Honda, which invested in auto and motorcycle plants in Ohio in the 1980s and helped create thousands of new U.S. jobs, have little motivation to move their profits elsewhere. Germany's corporate tax rate is 51% and Japan's is 46%, while the rate in the U.S. is only 34%. "There's just not much incentive for these companies to move their profits to higher-tax countries," says Hufbauer.