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Saturday, March 27, 2004

Has John Kerry found supply-side religion?

Yesterday, Kerry unveiled part of his economic plan, claiming to slash corporate taxes and battle outsourcing. summarizes his proposal:

Current tax laws allow American companies to defer paying taxes on income earned by their foreign subsidiaries until they bring it back to the United States. If they keep the money abroad, they avoid paying U.S. taxes entirely.

Kerry would require companies to pay taxes on their international income as they earn it rather than being allowed to defer it. The new system would apply to profits earned in future years only, not retroactively.

He also would allow companies to defer taxes when they locate a business in a foreign country that serves that nation's markets.


Kerry's campaign estimates that the change would save $12 billion a year. The savings would be used to reduce the corporate tax rate from 35 percent to 33.25 percent — a 5 percent reduction.

More than 99 percent of companies paying corporate taxes would see their tax bills lowered, the campaign says. But the 1 percent paying higher taxes are some of the nation's biggest and most powerful.

Larry Kudlow, writing today on NRO, is not impressed.

Sen. John Kerry moved to the right of Walter Mondale by proposing a small cut in the corporate tax rate, which he would lower to 33 ¼ percent from 35 percent. In political terms, it’s a clever ploy. In economic terms, it merely provides a small offset to the significant tax hikes Kerry proposes on capital formation, where he would slap small businesses, top-bracket taxpayers, dividends, and capital gains.

The Kerry proposal to rollback the Bush tax cuts would raise the after-tax cost and reduce the post-tax investment return on capital by more than 54 ½ percent. Taking out the upper-bracket labor-income component — which is still investment capital — the Kerry tax hike would reduce investment incentives by nearly 47 percent and work-effort returns by more that 7 ½ percent. A big hit.

Offsetting that, Kerry’s corporate tax cut would raise after-tax returns on corporate income by almost 2 ¾ percent. But that’s only a tiny amount compared to the overall tax-hike proposal.

Kerry would also terminate the extra-territorial tax credit for multinational companies with offshore operations. ... [H]e’s pandering to the current political hysteria over so-called jobs outsourcing, a misinformation campaign that Kerry compounds with his threats to terminate a number of free-trade agreements.

As the profits of U.S. firms are taxed overseas as well as at home (when the income is transferred back to the U.S.), companies are unfairly double-taxed on their earnings. .... Why should American companies be double-taxed on a worldwide basis when nearly all other foreign companies, including those in Europe, are only single taxed? ...

Narrow-minded members of Congress who are obsessed with the phony outsourcing argument are trying to punish international companies, arguing that the “loophole” that lets corporations defer foreign-earned profits with a special tax credit is merely a reward for creating offshore jobs. This is Sen. Kerry’s argument.

But the truth is, the territorial tax break is only a small part of the corporate rationale to locate part of an operation overseas. The greater justification is to be closer to foreign customers. And yes: Why should companies be double-taxed at home and abroad?

As for the outsourcing argument, that’s old-fashioned fear-mongering. Recent trade data show that there’s far more insourcing of service jobs from foreigners who invest directly in the U.S. than outsourcing of jobs from U.S. foreign investment. In manufacturing there is a net outsourcing, but that number hasn’t changed in 20 years, a period during which the U.S. created 38 million new domestic jobs. “Outsourcing” today is a phony war against American business and open international trade.

Unfortunately, it probably doesn't matter that much whether the outsourcing argument is fear-mongering, because I suspect it is going to be politically effective fear-mongering. And even if Kerry's elimination of the territorial tax break wouldn't reduce outsourcing, I think he will score political points on his attempt to do something about it.

While we are on the subject of political posturing, I thought this bit from Kerry's speech was amusing:

Instead of a real economic plan, they've given us the old politics of negative attacks. The truth is, this president doesn't have a record to run on but a record to run from.

That's right. Read the first sentence. Then read the second one. Amazing, huh? Even on the subject of "the old politics of negative attacks," Kerry is passionately on both sides.

Back to the piece, the Bush people spent Friday doing the Tax Code (Re)Shuffle:

White House spokesman Scott McClellan dismissed Kerry's proposal as a "tax shell game" that he said would not address the issue of jobs going overseas.

"This is nothing but a reshuffling of the tax code and a political shell game and can't erase the fact that John Kerry's record is one of raising taxes some 350 times," McClellan said.

"John Kerry's plan to reshuffle the corporate tax code does nothing to help America's small businesses and entrepreneurs be more competitive," Bush spokesman Steve Schmidt said.

While these responses are probably correct, I'm not sure they will be that effective. The Bush campaign needs to do more than simply assert that Kerry's plan won't work. We'll see if they come up with something better.


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