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Obama Tells

American Businesses

To Drop Dead

By Kevin Hassett

June 8th, 2009

BLOOMBERG.COM

I’ve finally figured out the

Obama economic strategy. 

President Barack Obama and 

his team have been having so 

much fun wielding dictatorial 

power while rescuing 

“failed” firms, 

that they have developed a 

scheme to gain the same power 

over every business. 

The plan is to enact policies 

that are so anticompetitive 

that every firm needs a bailout.

Once that happens, 

their new pay czar Kenneth 

Feinberg can set the wage for 

everybody and Rahm Emanuel

can stack the boards of all of 

our companies with his 

political cronies.

I know, it sounds 

like an exaggeration. 

But look at it this way. 

If there were a power 

ranking of U.S. companies, 

like the ones compiled by 

football writers for National 

Football League teams, 

Microsoft would surely be 

first or second to Google. 

But last week, 

Microsoft Chief Executive Officer 

Steve Ballmer came to Washington

to announce what Microsoft would 

do if Obama’s multinational tax 

policy is enacted.

“It makes U.S. 

jobs more expensive,” 

Ballmer said, 

“We’re better off taking lots 

of people and moving them 

out of the U.S.” 

If Microsoft, 

perhaps our most 

competitive company, 

has to abandon the U.S. in 

order to continue to thrive, 

who exactly is going to stay?

At issue is Obama’s policy 

to end the deferral of 

multinational taxation.

The U.S. now has about the 

highest combined corporate 

tax rate, 

second only to Japan among 

industrialized countries. 

That rate is so high that 

U.S. firms have an enormous 

disadvantage versus competitors. 

The average corporate tax rate 

for the major developed countries

in the Organization for Economic 

Cooperation and Development 

in 2008 was about 27 percent, 

more than 10 percentage points 

lower than the U.S. rate.

Tax Burden

U.S. firms have nonetheless 

prospered because our tax code

allows a business to set up a 

subsidiary in a low-tax country. 

When that subsidiary 

earns profits, 

they are taxed at the rate 

of that country, 

and don’t face U.S. tax until 

the money is mailed home.

The economically illiterate 

partisan Democratic view is 

that this practice is unpatriotic

and bleeds jobs from the U.S. 

The economic reality is that 

American companies use this 

approach to acquire market 

share overseas. 

The alternative is losing the 

business to foreign competitors.

Don’t just take my word for it. 

A recent paper by Harvard 

economists Mihir Desai and 

C. Fritz Foley and Berkeley 

economist James Hines and 

published in the distinguished

American Economic Review, 

gathered data on American 

multinationals to explore the 

impact of foreign investments 

on domestic U.S. activity.

Encourage Overseas Sales

Their conclusion was striking. 

The authors found that 

“10 percent greater foreign 

capital investment is associated 

with 2.2 percent greater domestic

investment, and that 10 percent 

greater foreign employee 

compensation is associated 

with 4 percent greater domestic

employee compensation. 

Changes in foreign 

and domestic sales, assets, 

and numbers of employees are 

likewise positively associated; 

the evidence also indicates 

that greater foreign investment

is associated with additional 

domestic exports and 

R&D spending.”

So when firms expand their 

operations abroad, taking 

advantage of the lower 

foreign tax rates, 

it helps their workers in the 

U.S. Higher sales abroad 

(surprise, surprise) 

are good for domestic workers.

It is worth noting that this study,

which is confirmed by a boatload

of evidence elsewhere, 

was coauthored by the same 

James Hines who recently 

wrote a sweeping review of 

international tax policy with 

Obama’s top economist, 

Larry Summers.

Summers 

has to know what the 

literature says.

Inexplicable Stance

So the question is,

why 

does Obama advocate a 

policy that so flies in the 

face of everything that 

economists have learned? 

How could Obama possibly say,

as he did last month, 

that he wants 

“to see our companies 

remain the most competitive 

in the world. 

But the way to make sure 

that happens is not to reward 

our companies for moving jobs 

off our shores or transferring 

profits to overseas tax havens?”

Further, 

how could Treasury Secretary 

Tim Geithner call a practice 

that top scholarship has shown 

increases wages and employment

in the U.S. “indefensible?”

I have to admit 

I am at a loss. 

Maybe it is good politics 

to bash American corporations, 

and Obama isn’t really serious 

about making this change happen.

But if the change is enacted, 

and domestic corporate taxes 

aren’t reduced to offset 

the big tax hike, the result 

will be a flight from the U.S. 

that rivals in scale the greatest 

avian arctic migrations.

If that occurs, 

the firms that stay in the U.S. 

will be at such a huge tax 

disadvantage that they will 

absolutely need a “rescue.”

(Kevin Hassett, 

director of economic-policy 

studies at the American 

Enterprise Institute, 

is a Bloomberg News columnist. 

He was an adviser 

to Republican Senator 

John McCain of Arizona 

in the 2008 presidential election. 

The opinions expressed 

are his own.)