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Although some non-U.S. companies surely do evade American taxes, the IRS's previous efforts to crack down on violators have borne relatively little fruit. Earlier this month the Japanese electronics giant Matsushita, which sells products in the U.S. under the Panasonic and Quasar brand names, reached an agreement with the IRS to pay a settlement in that kind of dispute. The amount was a mere $4.8 million. At least 47 Japanese companies in the U.S. have been involved in similar cases within the past five years. Many such companies are now taking Matsushita's accommodating approach, which will produce as much as $6 billion in new U.S. revenue over the next four years, far short of what Clinton's camp has hoped for.
Clinton's miscalculation of the gains to be had from taxing foreign firms masks a larger problem: a shortsighted view of outside investment in the U.S. "We're in a real struggle for foreign capital, and we're going to need huge amounts of it," says Jeffrey Garten, a professor at Columbia University's business school. "If the U.S. tries the gunboat approach, we're going to put the country at a huge disadvantage."
Given the poor return he is likely to get from trying to collect these taxes under the current laws, Clinton's second strategy might be to impose a "presumptive tax" of some sort, possibly a minimum levy on the total sales -- rather than profits -- of foreign companies in the U.S. But that kind of policy could backfire mightily. Germany has declared that if Clinton imposes such new taxation, Bonn will retaliate against local subsidiaries of American firms. With global trade tensions already at a fever pitch and foreign companies increasingly unhappy with conditions in the U.S., any further discouragement of outside capital might cause real harm to American economic growth. "Foreign investors have been very frustrated over the past two years," says Robert Hormats, vice chairman of Goldman Sachs International. "They're amazed that we're not dealing with the underlying problems of the economy, like the deficit and the educational system. They want to be reassured that we're going to fix them."
What foreign companies do not want is to pay a huge chunk of the bill for repairing these problems. Soaking the foreigners may have sounded to Clinton and his advisers like a politically painless program, but it could cost the + U.S. a lot more in lost capital investment than it would gain in taxes. "Clinton is just going to have to rethink his policies on international taxation," says Garten. If Clinton does so, he will probably have to find the money elsewhere -- or come to realize that his spending plan is too ambitious.