Assailing corporations is a poor competitiveness strategy

As globalization and offshoring have ramped up, the left and right have both responded with failed strategies.

The right’s response has been Panglossian, denying the problem. The left’s response has been vituperative, and worse in its consequences. When liberals see U.S. companies sourcing globally, they don’t see trade, they see betrayal. They don’t see the inexorable creation of an integrated global market — they see, in the words of Lou Dobbs, a “War on the Middle Class.”

ADVERTISEMENT
These observers miss the fact that the United States is in a race for global innovation advantage that requires policies that promote a competitive business climate to attract investment instead of repel it. Notwithstanding the recent surge in energy production, American companies still face sharp competition as other countries become more attractive places to do business.

It is in this context that tomorrow’s Senate Homeland Security and Government Affairs's Permanent Subcommittee on Investigations hearing on “Offshore Profit Shifting and the U.S. Tax Code” should be understood. While Chairman Carl Levin (D-Mich.) will question a number of witnesses, the real show will be when Apple CEO Tim Cook is asked to explain why Apple is unpatriotic and not only makes profits offshore, but refuses to bring them home and pay taxes on them. Rather than focusing on the need for tax reform, Levin will argue that Apple should voluntarily pay more taxes than it is legally required to do.

Under the tax code U.S. multinationals are responsible for paying the difference between the tax rate in the nation where they make profits and the U.S. rate of 35 percent, but only when these profits are repatriated. Unlike virtually every other nation that only taxes profits earned in their own country, the United States taxes profits regardless of where they are generated. In response, many U.S. companies defer foreign earnings, a perfectly legal practice. To be clear, it is one thing to go after offshore tax havens like the Cayman Islands that only exist to hide the true source of income from taxation. It is quite another to attack successful U.S. corporations legally keeping earnings overseas.

But for many on the left there’s no difference between tax havens and deferral. And because there are not the votes in Congress to end deferral, they believe that if they “name and shame” multinationals they will pay higher taxes and source more work domestically. But doing so would amount to a tax increase that would raise the cost for American companies but not their rivals.

Instead of assailing high-profile CEOs, Congress should take a page out of Pogo and recognize that “we have met the enemy and he is us.” There is a simple reason why U.S. companies move work offshore and so few foreign companies make U.S. greenfield investments. The United States has not kept up with other nations in creating an attractive investment climate.

Our shortcomings are numerous. At over 39 percent, the combined federal-state corporate tax rate is the highest in the world, while our R&D tax credit, once the most generous, now ranks 27th. Of 10 nations with data going back to 1989, only the United States increased its effective corporate tax rate.

But it’s not just tax policy where we are falling behind. U.S. progress from 2005 to 2010 on the World Bank’s “Doing Business” indicators (a measure of regulatory burdens), was a dismal 40th out of 44 nations. And while many nations are expanding support for research, federal support as a share of GDP has lagged. No wonder we are losing jobs to foreign competition.

But one reason we don’t have this conversation is because no CEO wants to sit in the hot seat in a Senate hearing room and admit that their company has to move production offshore in order to remain globally competitive. It is time for CEOs to stand up and say "yes, my company moves jobs to other nations and we will continue to do so until Congress puts in place a real national competitiveness strategy." This should include a more competitive corporate tax code, smarter regulations that don’t unduly hamper firms, a robust technology strategy and aggressive action against foreign mercantilist policies.

If America is going to win the race for global advantage, the left will need to abandon its anti-corporate stance and acknowledge that policies that help, not hurt, corporations are needed. If Levin and the subcommittee are going to investigate something, they ought to investigate why America is no longer the place companies from the U.S. or around the world want to invest in and what we need to do fix that.


Atkinson is president of the Information Technology and Innovation Foundation and author of Innovation Economics: The Race for Global Advantage.